OPINION:A LOT of attention has been paid to Irish financial and economic problems recently. They are indeed serious. Ireland has been a huge beneficiary of the global financial boom in recent years. That it has ended means a genuine adjustment on a large scale, not just some cyclical downswing followed by a rapid recovery. The world's financial sector will be smaller in future, because the world's borrowers have too much debt already: the volume of new loans could be minimal for years, as many people need to repay debt, not take on more.
That means fewer bankers and less need for banking activity, apart from those convenient “holes in the wall”. And Ireland, even more than Britain, is a country that has disproportionately benefited from the financial boom, and therefore has most to give up now it is ended.
But just because the economy has to go through the wringer, does that mean Ireland cannot cope – that Ireland needs to hide behind the skirts of some European “Big Mother”? Certainly not. In reality, Ireland has little to fear “except fear itself”. Its income far exceeds European norms. Ireland has done extraordinarily well in its 25-year boom. It used to be far poorer than core European countries. By 2007 it was close to the US in average income and over a third better off than Britain, France and Germany. Income may need to fall, but Ireland will still be an island of relative prosperity. And by the way – income is falling fast elsewhere too!
Ireland has a small, service-based economy with a substantial migrant element in the labour force, mostly from east European members of the EU. Taoiseach Brian Cowen recently said real GDP would fall 10 per cent over three years. My colleagues praised him for not covering up, unlike most politicians. But perhaps he did. Maybe Irish real GDP will fall more. In either case, many of the migrant workers will go home, income per head of those still in Ireland (including all indigenous Irish) will fall by less than output, and remain enviably ahead of Britain, Germany and France.
And Ireland’s financial problem? Would that we all had such problems! Ireland has virtually no net government debt. The banking sector is indeed large. Total deposits on the broadest definition are about 130 per cent of GDP. Suppose the financial sector needs to be recapitalised at one-fifth of this balance sheet (an extreme assumption). Then Irish debt would rise by less than a quarter of national income, depending on the actual losses emerging, and would remain well below most other countries, including all the major Europeans. Meanwhile, the widening of Government bond spreads against German bunds must be seen against the falling absolute level of the latter. Current Irish 10-year yields are an affordable 5½ per cent. They look a much better risk-adjusted bet for investors than Germany’s debt at just over 3¼ per cent.
Much of the venom concerning Irish financial problems comes from balanced-budget fanatics in Brussels and north-central Europe. These countries with their savings gluts have been free-riders on other countries’ domestic demand for years. They are smug about the temporary difficulties of the more dynamic spender economies.
But the crash in German and Benelux GDPs following that of their exports may soon make them wring their hands, dependent as they are for exports, and therefore output and income, upon deficit-country borrowing. Much the same people are determined to punish Ireland for rejecting the latest version of the European constitution in the referendum. Their hope is that financial stress will force Ireland to seek fellow EMU members’ help, for which the condition will be another referendum pronto, their hope being that an Irish populace cowed by strong recession will cave in and approve it.
But other countries should envy Ireland its problems, and the EMU panjandrums should switch their attention to the economic disaster that is developing amongst the Mediterranean members of EMU, and farther north on the Continent.
Charles Dumas is chief economist of Lombard Street Research