Ireland must protect itself against economic relapse

OPINION:Christine Lagarde rightly emphasised yesterday in Dublin the need to take steps to prevent slippage

This week’s visit to Dublin of Christine Lagarde – the first ever by an International Monetary Fund head to Ireland – was a major milestone. It reminded us that, at least for the moment, Ireland continues to rely on a bailout from the IMF and the EU to fund the day-to-day needs of the State. That Ireland finds itself in such a situation would have been inconceivable only a few years ago.

Yet, despite many dire predictions, we have so far “lived to tell the tale” and more. Slowly but surely – and at considerable, but to a large extent unavoidable, cost, as emphasised by Lagarde – the fiscal excesses of the property boom have been worked off. Green shoots have started to appear on the growth and employment fronts while the banking sector is stable, albeit fragile. There has been some easing of the debt burden with more in prospect, while Irish bond yields have fallen dramatically.

IMF heads customarily do not visit countries where programmes are failing or where there are likely to be major anti-IMF demonstrations – this they leave to their staff. Lagarde’s presence in Dublin is thus especially significant. She has not visited Greece or Portugal or, for that matter, Spain or Italy recently. The IMF, with its share of failures over the years, is naturally anxious to celebrate a “success story”.

Barring any sudden disasters, it is virtually a foregone conclusion that the Government will meet all the agreed budgetary targets and this will mark Ireland’s formal “exit” from the programme.

However, the IMF head rightly emphasised the need to plan and to take appropriate precautions so as to prevent any relapses. One of the purposes of her visit was to discuss with the Irish authorities how this might best be achieved. As Ireland is set to be the first country to exit the euro debt crisis, the handling of its case will have important ramifications for other exiting countries later.

There are two risks to consider. First, a major resurgence of the euro debt crisis can by no means be ruled out. Apart from the ever-present Greek problem, the anti- austerity message of the recent Italian elections, continuing adjustment fatigue in Spain and Portugal, and the new Cyprus bailout, all underline that there is a long way to go before stability is assured for the euro area. A continuing euro wide recession coupled with renewed financial instability could have serious repercussions for Ireland, especially since Ireland’s debt burden remains the second highest in the euro zone after that of Greece. Lagarde’s message, that there is no room for complacency, surely is correct.

The second risk – naturally not mentioned explicitly by the Government or by Lagarde – concerns the possibility of domestic adjustment fatigue setting in after the end of the bailout. With a general election due in early 2016 at the latest, the budget for 2015 is bound to be a key component of the election campaign. And in keeping with a long-standing tradition in Irish politics and elsewhere, the temptation to provide pre-election budget giveaways will surely arise.

Aware of the possibility of slippages, so long as 25 per cent of EU bailout funding remains to be repaid the EU Commission will continue to “monitor” Irish budgetary performance, including by requesting (“insisting?”) that additional measures be taken if needed. However, the EU’s ability to enforce compliance, if judged by its record in the pre-crash years, has yet to be tested.