The Irish is economy is growing, unemployment is falling and the country is expected to be the first to exit its bailout programme. Does that mean Ireland should be viewed as the poster child for the success of austerity in Europe?
Between 2000 and 2008 the Irish economy grew at a very respectable 6 per cent a year, but the financial crisis and the collapse of the housing market hit the country hard, forcing it into a steep recession. When the yield on its government debt started to rise, Ireland was effectively shut out of the bond market and the government forced to accept an €85bn (£72bn) bailout from international lenders, the ‘Troika’ – the European Commission, International Monetary Fund and European Central Bank. The penance for accepting this aid was a strict plan of budget cuts and tax rises to reduce the fiscal deficit. According to the recent budget release, the total austerity absorbed since the bailout has been a hefty €31bn (£26bn).
Ireland’s 2014 budget, released in October, was its seventh hard-line budget in six years and continues with the austerity programme, although at a slower pace. The government aims to implement another €2.5bn (£2.1bn) in spending cuts and tax increases in the coming fiscal year – less than the €3.1bn (£2.6bn) that the Troika was looking for. However, even at this reduced level of consolidation, forecasts show that the budget deficit is expected to fall to 4.8 per cent in 2014, well below the Troika target of 5.1 per cent. The 2015 estimate of 3 per cent, if achieved, would mean Ireland would actually meet one of the key metrics stipulated under the Maastricht Treaty for entry into the single currency bloc (the other being a debt-to-gross domestic product ratio of no more than 60 per cent). This improving fiscal position means that Ireland is likely to exit from the bailout programme in December this year.
Meanwhile the Irish economy expanded by 0.4 per cent quarter-on-quarter in the three months to June and the outlook for growth is improving. Unemployment has fallen steadily since peaking in 2012, and was 13.3 per cent in September. Exports have increased as global economic momentum builds and there have been tentative signs of life in the housing market, although so far this is isolated in the main centres. All this adds up to the Irish government estimating that the pace of growth will rise to 2 per cent in 2014.
Ireland has been paraded as an example of how fiscal consolidation can be successfully implemented. However austerity alone will not result in a return to competitiveness for many of the peripheral European economies, especially given the crippling effect that budget cuts have had on the economic growth of those countries that have been forced to implement them. In Ireland’s case, it may have been more than just austerity that has helped the economy. Compared with its peripheral cousins, more of Ireland’s exports are destined for countries outside the eurozone, and for many years a weaker euro has supported overseas demand for the country’s goods and services. The very low relative corporate tax rate also made Ireland an attractive site for the headquarters of many multinationals. These factors may have also helped the economy at a time when the government was cutting spending.