Bailout achieved its financial goals but structural reform is a sterner challenge

Opinion: Mortgage arrears problem also has still to be tackled convincingly


This weekend marks the formal end of Ireland’s emergency bailout by the IMF and EU, a milestone rightly marked by much introspective analysis, including in the supplement published yesterday in this newspaper. Three years ago, the arrival in Dublin of the troika was greeted in apocalyptic, albeit resigned, terms, as commentators proclaimed the end of Irish economic and financial sovereignty . . . An Irish Times editorial asked “whether the men of 1916 had died for a bailout from the German chancellor. . . the shame of it all”.

Pundits , including several academics , predicted confidently the bailout was bound to fail. Attempts by the EU and the IMF (the “high priest of austerity”) to impose harsh and brutal budgetary cuts would be met with massive social unrest.

According to these commentators, hem, the only solution was for Ireland to follow the examples of Argentina and Russia and unilaterally default on its debts.

These dire predictions have not come to pass. In many respects, the bailout has been a classic ( and by no means that common) “IMF success story” in terms of largely achieving the specific goals of restoring financial stability and sovereign creditworthiness.

Sustained economic growth
However, meeting these objectives , while essential , is not sufficient to ensure sustained economic growth and increased employment. The latter depend on more complex factors that go beyond the programme and/or are not within the control of the Irish authorities. Moreover, while a bailout deals with an economy in crisis, tackling the underlying factors that contributed to the disaster occurring in the first place is usually much harder.

The major achievement under the bailout has been the steady reduction in the budget deficit, from 12 per cent of GDP in 2008 to just under 5 per cent envisaged for 2014. The debt to GDP ratio, after unavoidably rising during the last several years (every cent of a budget deficit translates, in essence, to a corresponding increase in debt) looks set to stabilise soon and then to decline. The bailout financing – the only funds available after the collapse of Irish creditworthiness – has prevented what would otherwise have been a brutal and virtually overnight cut in the deficit to zero.

Many of the external media descending on Dublin this weekend will ask why Ireland’s budgetary adjustment appears to have commanded broad support across much, if by no means all, of the political spectrum The absence of significant social unrest or strikes, compared to some other euro debt troubled countries, could be interpreted as reflecting a docile and meekly accepting population.

However, a more plausible explanation is that Irish people are realists and recognise that very many of them benefited temporarily from the artificial boom. Notwithstanding the controversies over the role of foreign lenders, arguably it has been generally accepted that much of the cost of weaning off earlier excesses had to be borne domestically. This is especially the case, given the small size of the Irish economy and its dependence on external partners. Simplistic and foolhardy calls three years ago for debt default and an exit from the euro failed to find traction among the vast majority of a pragmatic and realistic public.

Credit standing
While European-wide initiatives have certainly contributed, successful adherence to the terms of the bailout has led to a sharper improvement in Ireland’s credit standing than, one suspects , had been envisaged even by the programme’s architects. The programme also helped improve external cost competitiveness and facilitate the restructuring of the banking system. However, progress has been slow in addressing high costs and regulatory barriers in some key “ sheltered sectors” (in particular health care, the provision of drugs, and the legal profession), while the mortgage arrears problem has yet to be addressed satisfactorily.

Interestingly, shortfalls in implementing these kinds of “structural” reforms are not uncommon even in otherwise successful IMF programmes that achieve their broad macroeconomic goals. Unlike relatively straightforward tax or expenditure measures, the difficulties in overcoming the legal and institutional obstacles involved, not to mention opposition by vested interests, tend to be underestimated.

Finally, a bailout can, as in Ireland’s case, help restore the budget to a sustainable position, address other obstacles to cost effectiveness and growth and provide otherwise unavailable external financing to smooth the period of painful adjustment. But even a successful programme cannot produce growth and employment “out of a hat”, especially in the short run, or alleviate the tragically high costs associated with renewed emigration. The imperative need to reduce Ireland’s budget deficit has contributed to depressing economic activity. In addition, weak domestic confidence due to high levels of private sector indebtedness and a fragile external trading environment are key inhibiting factors that will take time to dissipate.

Neither can the bailout in itself deal readily with some of the weaknesses in approaches to economic policymaking that were significant underlying causes of Ireland’s financial crisis. These included the prevalence of “group think” and the stifling of “contrarian” viewpoints, an undue personalisation of issues. inadequate attention to the experiences of history and other countries, and a certain reluctance to involve outside expertise in the decision-making process. To this list can be added the absence of meaningful political reform. It is also incumbent perhaps on those who expressed so unequivocally their conviction that the bailout would be an a failure to recognise that in the real world, complex issues are very rarely of such a black and white nature.

Steps have been taken to address several of these areas since the crisis began. However, the relative success of Ireland’s bailout should not lead to complacency or inhibit deeper reflection on such issues. Otherwise, the men (and women) in dark suits from the IMF might well make a reappearance at some stage.

Donal Donovan is a former deputy director of the International Monetary Fund and a member of the Fiscal Advisory Council. He is co-author with Antoin Murphy of The Fall of the Celtic Tiger: Ireland and the Euro Debt Crisis

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