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Ireland to bounce back?

Bernd Riegert / ag
December 30, 2012

Two years ago, Ireland almost had to declare bankruptcy. Having implemented strict austerity measures and reforms, it now looks set to rebound - as a role model for others?

An Irish 50 cent coin (Margarethe Wichert/dapd)
Image: dapd

Three years ago, Ireland sought refuge under the EU's financial rescue scheme. There, it was granted 85 billion euros ($112 billion) by the euro group and the International Monetary Fund (IMF). Under the deal, the Irish government was obliged to take over all liabilities of the country's banks to avert an economic collapse. At that time, the banking sector had accumulated masses of bad property loans, together with huge speculation losses. The 2010 budget deficit reached a staggering 32 percent of GDP.

"A lost decade"

Since that time, there has been a change of government, and five austerity packages have been passed. During the process, domestic demand for goods and services collapsed and unemployment rose to 15 percent. Thousands of people emigrated, seeking their luck in Australia, the US or the UK. These days Ireland's Taoiseach (prime minister) Enda Kenny, of the center-right Fine Gael party, is rigorously implementing the austerity measures and reforms agreed on with the EU and IMF.

"We never said it would be easy. We never said it would happen overnight," Kenny said at a recent EU summit with regard to the results of the past two years. "We are in a very difficult situation. I want to stress that in the face of all these difficulties, whole parts of the Irish society are experiencing that we have to make tough decisions - in the interest of the people and the country. We try to do this as fair as possible."

Irish prime minister, Enda Kenny (AP Photo/Virginia Mayo)
Kenny: "We never said it would be easy or happen overnight"Image: AP

By now the Irish restructuring program is showing signs of success, according to Philip Lane, head of the faculty of economics at Trinity College in Dublin. Over the past months, the Irish economy has registered ever-so-slight growth, he said, a trend that should continue in 2013.

"To reach the GDP levels from before the crisis, I believe it's going to take us another five years. The 2009 recession was a very deep one," Lane told DW. "We're still a far cry from where we used to be. What we need is continuous economic growth until 2017. So, in a way, we can speak of a lost decade here."

The tiger is ready to come roaring back

The "Celtic tiger" - that's what Ireland was called during its economic boom 12 years ago. Once one of the poorest EU member states, it had fought its way up to having one of the Union's highest per-capita GDPs. But the property and financial crisis that followed turned the roaring tiger into a tiger rug. Now Kenny believes these days are over: "Investment into Ireland is very strong again."

Many houses in once booming Dublin now stand empty
Property in Dublin: Looking to rent out or sellImage: Mary Phelan

"I would like to remind you that prior to the change of government three years ago, we had lost 250,000 jobs. During the past year, 20,000 new jobs have been created," Kenny recently said in front of reporters. "There are signs of improvement: Banks can once again take on loans without the help of the government, and some government agencies can issue their own bonds again. These are signs of confidence." But not all is rosy: The 2012 budget deficit still reached 8.5 percent of GDP; and for 2013, the Irish national debt is estimated to peak at 121 percent of GDP.

Export business is the key

Irish banks in particular are still in the process of adapting: many employees were let go, and the state had intervened by buying the banks' bad credits and placing them in a "bad bank" financed by European aid money. So while the - still - nationalized banks and the construction sector are still weak, other areas are improving continuously, especially the service and technology sectors.

"There is a very functional export industry," said Holger Erdmann of the German-Irish chamber of commerce in Dublin. "Due to the small domestic market in Ireland, almost all manufacturers are exporting, too - so businesses and employees that are active in this field are doing rather well."

Lane believes that Irish policy makers have managed rather well to distribute austerity measures evenly. Besides, he said, income levels in Ireland had been rather high anyways, compared to the European average. "Most of the cuts had affected those with higher salaries, while those on the lower end remained somewhat protected - something that maybe didn't go so well in Greece or in Spain," Lane told DW.

A masked rider on horseback depicting Death leads an anti-austerity protest march in Dublin, Ireland (Shawn Pogatchnik/AP/dapd)
Relatively small: protests against Irish austerity measuresImage: dapd

Erdmann agrees that there has been neither impoverishment of large segments of the population nor a large number of protests. "On weekends, actually starting from Thursday, it's hard to even set a foot into bars or restaurants here in Dublin. Sometimes one really wonders: where is this economic crisis," he said in an interview with DW. But "of course there are groups in society that are marked by unemployment. Some households had purchased property at the peak of the housing boom and later lost 50 percent of its value. They are now unable to pay their mortgages."

Quarrel over old debts

The Irish leader is set to use the Irish EU presidency during the first half of 2013 to extend his strict measures for economic consolidation to other crisis-stricken countries, such as Spain, Cyprus and Greece.

He also intends to push ahead with a European banking union, something that would serve Ireland interests: The eurozone's permanent rescue fund (ESM) should take over old accumulated debts from Irish banks and thereby relieve the Irish budget, Kenny said. But the course of action regarding such "legacy assets" is highly disputed among the eurozone's finance ministers.

Sources within the German government suggest Finance Minister Wolfgang Schäuble strongly favors a solution in which each country has to manage its own legacy assets. Ireland meanwhile is threatening to withhold interest payments to the rescue fund until a common solution for dealing with these assets has been found.

Kenny's official stance is one that suggests optimism: By the end of 2013 Ireland wants to return to the international market, once again issuing government bonds without the help of any rescue fund.

A street sign of the Bank of Ireland in Dublin with passers-by (dpa)
Causing disputes: Irish banks look to shed off their legacy assetsImage: picture alliance/dpa

Whether this will work depends heavily on the global economy, Lane said, as Ireland is tied to the success of its export business. German companies in the area of thermal insulation, biofuels and nanotechnology are once again interested in doing business with Ireland, Erdman said.

But what really matters, he said, are Irish business ties across the Atlantic: "Almost half of all foreign investments are coming from the US. Over the past years, Americans have invested more in Ireland than in all the BRIC states - Brazil, Russia, India and China - combined," Erdmann said. This shows how important the US is for Ireland, he said, "Americans simply like to use Ireland as a stepping stone into Europe, not least because Ireland is the only English-speaking country in the eurozone."

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