OPTIMISTS ON the Irish economy can point to a number of developments in recent weeks to support their cause, from higher numbers of foreign tourists and strong exports to a much improved interest rate on EU bailout loans and a spectacular decline in the perceived risk of default by the State. The latter development reflects a sharply favourable shift in international sentiment towards Ireland. That, in turn, is reflected in a series of articles in this newspaper – Stress-testing the Irish Economy– which concludes today. In the series, a number of leading economists pointed to Ireland's many strengths, some of which may have been overlooked or understated as extreme pessimism has been as prevalent recently as cocksure invulnerability was at the height of the boom.
But just as sentiment towards Ireland has turned for the better, fears about the global economy have become pervasive. Dark clouds on the horizon are large and growing in number. Momentum in Europe and the US is at its weakest since the West’s economy pulled out of its depressionary nosedive in the spring of 2009. There is now a considerable risk that our main export markets could dip back into recession. Economic growth in Europe and the US in the second quarter of the year slowed to a snail’s pace. Most indicators of the health of the real economy in July and August point to a halting of growth in many large economies and weakness in most others. Renewed recession would inevitably hit the huge and successful foreign-focused part of the Irish economy. With the domestic economy still in recession, a slump in exports is the second last thing we need now.
The last thing Ireland needs is for the euro crisis to flare up again. The calming of that crisis in recent weeks is a great relief. It is to be hoped that it can remain contained. But a freezing up of the financial system, as happened in late 2008, is an omnipresent spectre. Concerns about the strength of the European banking system remain elevated. Last Sunday, the new managing director of the International Monetary Fund, Christine Lagarde, said bluntly that Europe’s banks need to be recapitalised. This led to a blizzard of denials from European leaders. But such denials have, all too frequently over the past three years, been proved wrong. Europe’s banking system is, at best, badly damaged. If it seizes up, the effect of that on an already weakened economy would be grave.
Despite much scepticism about the deal agreed by EU leaders on July 21st, it may be enough to contain the crisis and enable the slow strengthening of the single currency’s foundations. Whether it is or not, the deal was hugely beneficial for Ireland, with loans being advanced at considerably lower rates than some of those providing the funds. It provides a solid foundation to move forward. Combined with the difficult decisions taken by the previous administration, the new Government has little choice but to take further painful decisions. Provided it does so, light should begin to flicker more brightly at the end of the long dark tunnel Ireland entered into more than three years ago.