Frugal Ireland sets example for other EU states to follow
OPINION: WALL STREET JOURNAL:The Rupert Murdoch-owned bible of American business and finance yesterday praised the Republic – the Government and the people – for the way in which economic and banking problems have been tackled, in this lengthy editorial headlined The Irish Example
SPANISH TWO-year government bond yields climbed five basis points to 2.47 per cent on Monday morning, after Fitch last week cut Spain’s triple-A credit rating to double-A-plus. Ireland, on the other hand, has been making do with its diminished Fitch rating of double A-minus since November. And yet yesterday morning the yield on its two-year government bond was at 1.77 per cent, down seven basis points from the day before, though its 10-year yields remain elevated.
Meanwhile, both the OECD and the EU’s statistics agency predict that Irish growth – still seen slightly down for this year – will pick up to 3 per cent in 2011, well above their average forecasts for the overall euro zone. What a difference credibility makes.
On the surface, Ireland is in the same trouble as its euro brethren, if not worse. Its deficit-to-GDP ratio last year hit 14.3 per cent, meaning its apparent ability to pay its bills was even more dubious than Greece’s.
The small, open economy was hit early and deeply by the financial crisis, and its credit-driven construction bubble popped to reveal a pile of uncovered entitlement promises. Dublin, along with just about every other red ink-spattered national treasury, responded by making all the right noises about cutting spending.
So what makes Ireland special? Its political leaders are doing it – and have been since October 2008. The celtic tiger economy was born out of Ireland’s last fiscal crisis in the mid-1980s, another tale of runaway public spending. That eventually spawned supply side tax cuts to restart private-sector initiative, which allowed for uninterrupted growth from 1994 through 2007.
But while Dublin had learned the importance of nongovernment enterprise, it couldn’t resist indulging itself during the fat years. Government spending rose by 138 per cent in the decade before the crash, against economic growth of 72 per cent, according to Constantin Gurdgiev of Dublin’s Trinity College. By September 2008, the national debt was €46.96 billion in the hole.
Though Ireland’s rags to riches story is more dramatic than most, this tale of rampant government expansion is essentially the same one that Spain, Portugal, Italy and Greece have to tell. Eighteen months ago, all knew that their welfare states had become unsustainable. But, along with the US, they devised ever more lavish Keynesian spending schemes in the name of boosting “aggregate demand”, even as they continued to blow up their own balance sheets.
Ireland wasn’t immune and was one of the first European governments to guarantee bank deposits, to the tune of €485 billion, along with a “bad bank” scheme whose price keeps mounting. But Dublin simultaneously told its citizens to get ready for emergency spending cuts and proved it by slicing 10 per cent off government wages in October 2008.
By April 2009, Ireland had cut public spending by €1.8 billion. It also managed to squeeze additional tax revenue out of its strapped citizens, though it achieved this largely by broadening the tax base, for instance by including minimum-wage earners, rather than targeting hikes only at the wealthy. Crucially, Ireland maintained its 12.5 per cent corporate tax rate. By the end of last year, Dublin had implemented spending cuts and tax hikes worth about 5 per cent of GDP.
Turns out they had barely begun to slash. In July 2009, a special board commissioned by the Government presented its report showing €5.3 billion in potential savings for that year alone. The suggestion that made Irish headlines was its recommendation that more than 17,300 public jobs could go, along with its note that the Department of Arts, Sports and Tourism could be eliminated.
The Government used the report to cut its 2010 budget by €4 billion and is going through its recommendations to find a further €3 billion in cuts for 2011. So far, public workers have seen their pay slashed by up to 20 per cent, the State’s child benefits have been cut by roughly 10 per cent, and unemployment and other welfare benefits have been similarly gutted.
Athens, Madrid, Lisbon, Rome and the rest have begun to follow suit, finally having caught on that they can’t spend their way back to prosperity. The last year and a half of Irish asceticism is now seen as Europe’s Ghost of Frugality Future, and politicians around Europe could do worse than to look at Ireland’s cuts as a model.
But as University College Dublin’s Colm McCarthy, the chief architect behind the Irish cuts, told us last week: “Anyone can produce programmes . The issue is, have they taken the measures?”
Market watchers remain sceptical that Greece or Italy will make good on their promises, largely thanks to their citizens’ outrage at the merest mention of public wage freezes. Meanwhile, the Irish people deserve credit for greeting their Government’s attempted return to fiscal sanity with, well, sanity. Protesters have hit the streets of Dublin since the cutting began, but rarely have they shut down entire cities, and violence has been negligible.
Perhaps the Irish, having seen this before, better realise the dangers of runaway public spending. It hasn’t hurt that Ireland’s ruling party Fianna Fáil has been in the public opinion doldrums since the start of the crisis, meaning they’ve had little to lose – other than their arrears.
Aside from bond yields that aren’t as high as some others in the euro zone, the rewards for Ireland’s early frugality have been slow to come. Unemployment remains in the double digits, and citizens know there is more pain to come, even if growth does pick up next year.
But as the OECD pointed out in its report last week, the fact that Dublin let pocketbooks shrink along with demand has meant that “the notable improvement in Ireland’s price and cost competitiveness could allow growth to pick up more quickly than expected”.
There’s no pretending that Ireland’s cuts don’t hurt in the meantime, or that would be any easier for Spain, Greece, Italy or Portugal to take on. But as one of Ireland’s less austere sons, satirist PJ O’Rourke, once noted: “You can take 10 per cent off the top of anything.” Can, and did.
BRIAN LENIHAN, MINISTER FOR FINANCE
'Latest in a series of favourable pieces'
"THE PRAISE for Government policy in the Wall Street Journalis just the latest in a series of favourable opinion pieces in respected international financial media outlets. They reflect real international confidence in the ability of this country to resolve its current difficulties and return to growth. Forecasters are marking up their projections for economic growth in the country, amid mounting evidence that the economy has turned. There is understandable anger about the crisis, but the overwhelming majority of our citizens have shown remarkable foresight and maturity in accepting the need for the difficult decisions the Government has had to take. Our actions over the last two years have boosted international confidence in our ability to recover. We need now to engender that confidence here at home."
JOAN BURTON, LABOUR SPOKESWOMAN ON FINANCE
'People are waiting in the long grass'
"THE Wall Street Journalpraises the Irish people for their tolerant response to Government austerity measures. It would be wrong, in my view, to confuse this with an endorsement of government policies. There is no appetite here for political violence. Instead, our people have chosen the political route to express their anger. Local, European and byelection results all testify to this. The people are waiting in the long grass for general election day to pass their verdict on the policies that created the crisis and the astronomical cost of the bank bailouts."
RICHARD BRUTON, FINE GAEL FINANCE SPOKESMAN
'The Irish people deserve praise'
"ANY EXPRESSION of confidence in Ireland by the Wall Street Journalis welcome, even if they have a fairly narrow focus on the risk spread on bonds. Significantly, the article itself challenges the excessive cost of the Government’s banking policy. The Irish people deserve praise for their acceptance of lower living standards to correct our mismanaged public finances, but this effort has been hampered by some spectacularly bad decisions by the Government. Decisions like 55 per cent of the fiscal measures being cuts in capital spending or tax increases and only 10 per cent of the McCarthy report recommendations being implemented. These all hindered rather than helped our cause."
DAVID BEGG, THE IRISH CONGRESS OF TRADE UNIONS
'Praise should give pause for thought'
"SUCH EFFUSIVE praise from the Wall Street Journalshould give pause for thought: the Journalwas cheerleader in chief while Wall Street brought down the global economy.
"Until recently there was a slim chance that loading the cost of the collapse onto wage earners and welfare recipients might work – until others began to copy it.
"A small economy might get away with simulated competitive devaluation if larger economies are growing, but as the WSJ should know, the world never deflated itself out of crisis."JOE HIGGINS, SOCIALIST PARTY MEP FOR DUBLIN
'A patronising pat on the head'
"THE Wall Street Journalgives the Fianna Fáil/Green Party Government a patronising pat on the head because its savage programme of attacks on the living standards of working people and the poor is pleasing to the sharks who constitute the financial markets. And why shouldn’t the economic dictatorship of hedge funds and investment adventurers who make up these markets be pleased with the assault on living standards since the resources that should go into better services go to their profits instead?
"Let’s not be flattered with the faint praise of this mouthpiece of international capitalism but challenge the dictatorship it champions, take these institutions into public ownership and democratic control as a basis for economic regeneration."
BRIAN LUCEY, TCD ASSOCIATE PROFESSOR IN FINANCE
'Praise is even nicer when it's deserved'
"PRAISE IS always nice, but it’s even nicer when it’s deserved. The Wall Street Journalglosses over the monstrous cost, both real and potential, of the Government’s banking policy. There is little doubt that the Government is broadly correct in its macro policy but one doesn’t have to be Morgan Kelly to realise that this is hampered significantly by the need to constantly watch for horrors emerging from the bottomless swamp that is the Irish banking system. It’s also nice to know that the Government is “going through” the McCarthy report to find cuts – and there was me thinking that it had been quietly shelved as political plutonium, alongside the Commission on Taxation."