The world has watched transfixed as Scotland wrestled with its destiny. But now that its future is settled, it is Scotland's Celtic neighbour Ireland that should be drawing attention.
It was revealed last week that Ireland enjoyed astonishing growth in the second quarter. At an annualised rate of 7.7 per cent, this is a pace unseen since the heady days of the early 2000s. After becoming the first country to exit its EU bailout, it is now forecast to continue growing strongly. As countries such as France and Italy stagnate, while bickering about long overdue reforms, they should take note of exactly how the Irish have done this.
In some ways Ireland has been fortunate. Its two biggest trading partners, the US and Britain, are both growing strongly. Its low bond yields owe more to the decisive actions of Mario Draghi, European Central Bank president, than to any decisions made in Dublin.
But this is not just the luck of the Irish. For seven years its government and long-suffering people have taken the toughest of choices. The costs of a bloated public sector were reduced with swingeing wage cuts and slashing the payroll. Private sector wages have fallen by more than 2 per cent annually in the past four years, restoring competitiveness to industry. Above all, the government recognised the serious risk played by its shattered banking system and took steps to rebuild it. Through its "bad bank", the National Asset Management Agency, it made banks come clean about their losses. By forcibly swapping toxic assets for safer government debt, it cleared the way for lending to start again.
These early glimmers of optimism should not be mistaken for a return to the carefree days of easy growth. Ireland is not yet out of the woods. At about 120 per cent of gross domestic product, its public debt is set to remain at dangerous levels for many years. Private debt is even worse; despite the work of Nama, more than 10 per cent of bank loans are classified as non-performing. Ireland still has to fix an unbalanced housing market, where empty “ghost estates” coexist with a serious shortage of property in Dublin.
The hangover from years of heedless expansion has left Ireland with no choice but to seek growth in other ways rather than starting the party all over again. Whereas before the crisis personal consumption grew at more than 6 per cent a year, it will now play little role in driving the economy. Continual pay cuts and double-digit unemployment have left the shell-shocked Irish shopper unwilling to spend.
Instead, Ireland must rely on exports and on attracting overseas investment. Wage restraint has restored competitiveness, which alongside a flexible English-speaking labour force, make it a choice destination for multinational companies such as Pfizer, Dell and Apple. As a result, Ireland has a healthy current account surplus and investment growth of 15 per cent per year.
The European economy remains in a depressed state. For struggling eurozone nations it must be tempting to place their hopes in more effective action at an EU level. But recent efforts to pep up demand look insufficient. And for small, open economies such as Ireland external conditions are far less important than steps taken at home.
These are early days for Ireland’s recovery. Few countries soared as high or crashed as hard. It remains a long way from its previous peak. Yet it provides growing evidence of how countries that shape up after a crisis can recover strongly despite an unfavourable international outlook. Others should learn from its example.
- (Copyright The Financial Times Limited 2014)