IRELAND DESERVES great credit for the manner in which it has faced up to and tackled its fiscal crisis, but current efforts will have to be sustained for up to a decade if the economy is to make a full recovery, according to a leading international economist.
Citi chief economist Willem Buiter yesterday praised Minister for Finance Brian Lenihan's "necessarily tough and well-structured" budget package which managed to find political support while convincing international markets "that Ireland was for real".
However, in an interview with The Irish Times, Mr Buiter - who spoke at a Citi conference in Dublin - warned that the crisis is so big, and the hole in Ireland's public finances so deep, that these efforts will have to be sustained for several years, perhaps a decade, before the economy is restored "to where you thought you were", he said.
Nonetheless, he described Ireland's "intelligently designed" approach to restoring fiscal stability as a "model of how to do things".
"I think the country deserves great credit and I wish that some of the other euro zone member states that are in similar or worse pickles would sing from your hymn book," he added.
He also said it would be "suicidal" for a "weaker country" to exit the euro region as they would also have to leave the European Union.
"The only risk to the euro zone is not from our weaker brothers and sisters - it's the stronger countries, Germany, saying, 'I am fed up having to face the risk of bailing out the weaker'," he said. For "political and historical reasons", Germany is the least likely country to leave, he said.
Downgrades to Greece's debt late last year renewed concern that some countries may struggle to pay their bills. The Greek budget deficit widened to 12.7 per cent of gross domestic product in 2009, more than four times the European Union limit.
The average euro zone deficit will widen to 6.9 per cent of GDP this year, the European Commission estimates. Mr Buiter said there was a "non-negligible risk" that a euro-area country may "restructure its debt", with a 5 per cent chance that Greece will seek to renegotiate its loans.
"The chance of Ireland defaulting is effectively nil because they have taken the right measures," he said, referring to spending-cut plans announced by the Irish Government. "Greece isn't there yet."
The premium investors demand to hold Greek bonds instead of German bunds has widened to 218 basis points from 30 points two years ago.
The spreads of their Spanish and Irish counterparts over German debt are at least three times what they were in January 2008.
Mr Buiter said he did not see "any threat of inflation" in the 16-nation euro region and did not expect the European Central Bank to raise interest rates this year.
The Bank of England may "start tinkering" in the middle of 2010 and increase its benchmark rate to between 0.75 per cent and 1 per cent by the end of the year, from 0.5 per cent currently, he said. - (Additional reporting from Bloomberg)
