Ireland Remains at Heart of Eurozone Trouble

Ireland does have to do more cuts, it does have to reform its public sector pay scale, and it is going to have to do so in a way that will continue to drive the domestic economy into a deepening downward spiral if it wishes to sustain European support, which it now cannot survive economically without.
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Having just returned from several weeks in Ireland, I am struck to find a spate of articles showing that second quarter growth in the Irish economy proves that deep austerity programs are good for a country in deep recession. On 23 September, the Wall Street Journal asked "Is the Celtic Tiger Purring Again?" -- pointing to Irish government numbers showing that the export economy was helping to fuel new Irish growth -- measured in the 2nd quarter as 1.6 percent GDP -- and importantly, modest 2nd quarter domestic GNP growth of 1.1 percent. Not stellar -- but the highest increase in economic productivity in a long time for this small island nation.

Ireland's recent growth, however, was most likely a lagging indicator following the earlier modest economic productivity in the United States and previous German growth -- now in decline. The real story is that the 2nd quarter growth comes on top of the first quarter domestic decline of 4.3 percent. Taken together, Ireland remains in deeply negative domestic growth for the year. Worse, even with a longer term bailout and a reduced rate from the European Union/International Monetary Fund, Ireland is likely to need more tranches of bailout and find it difficult to return to the markets to finance its debt. For this reason Moody's downgraded Ireland to "junk" rating this summer -- not based on current performance but on the reality that Ireland remains so deeply in debt that default seems a likely option minus ongoing European Union support.

The most current data shows that Ireland is positioned to get far worse before it gets better. The new quarter began in July with a steep decline of value of exports off by 10 percent from the previous year. Due to a deepening Eurozone crisis, Ireland has shown that the assumption that it can export its way to recovery is a high risk gamble. A second global recession would be decimating to growth, and put even more pressure on the already harsh conditions of Ireland's bailout.

The Irish people seem to understand this and are showing it with their consumption. Irish retail sales dropped dramatically in August -- at a time when tourism and back to school buying would traditionally provide a major boost. In the year to date, domestic sales have dropped by 3.6 percent. A very good measure of how average people are thinking about their spending, back to school purchases on books, stationary and other basic supplies fell in August by 13.3 percent. Medicinal and pharmaceutical spending fell by 10 percent. Basic home purchases like furniture fell by 9.5 percent.

Meanwhile, Irish property levels have now dropped by 43 percent off their pre-crash value. Ireland this year has seen an annual 4 percent drop in household lending from banks and a 2.5 percent drop for business lending and an overall 10.4 percent drop in banking deposits.

Overall measures of consumer sentiment fell in September to the lowest figure since February. As economist David Duffy told the Irish Times, "The majority of consumers expect that household finances will deteriorate, unemployment will rise, and (the) economic situation will become worse over the next 12 months." Much of this sentiment is built around an expectation that even deeper austerity measures are coming. Just this week, teacher pensions were put on the table by the Irish government -- sparking strong warnings from public sector employees who have been reassured that their wages and benefits had taken all the hits they would.

And yet, Ireland does have to do more cuts, it does have to reform its public sector pay scale, and it is going to have to do so in a way that will continue to drive the domestic economy into a deepening downward spiral if it wishes to sustain European support, which it now cannot survive economically without.

Herein lies the dilemma for Ireland. What is actually mainly working right now for the country is a sense in the global markets that Ireland is doing what has been asked of it regarding its bailout and not causing the kinds of headaches that Greece is. However, if Greece defaults, either in a managed way or in a crisis, the pressure on Ireland to default will accelerate. While some Irish celebrity economists say default will be praised by the global markets, the reality is that it would decimate the Irish economy -- likely leading to capital flight and runs on the banks and even higher emigration and unemployment going well beyond the existing 14.5 percent.

It is with all this in mind that one finds it frustrating to hear stories about how the Celtic Tiger might be back, based on one quarter of economic data. This is misleading and creates a false sense of comfort at an extremely dangerous moment for Ireland. The cuts are causing extreme pain on this society, and there may be a tipping point where disconnect between what is being said about Ireland and what people there are feeling will arrive. And, if this comes on the heels of the Greek crises, this tipping point might well come much faster than many anticipate and with dire consequences for the European and American economies.

Just as frustrating though, is that Ireland is well positioned over the long-term. Ireland can lead the world on a new foundation of progressive globalization and economic development. But that cannot happen if the leaders there, and if the international press, do not begin the discussion with a brutal sense of realism -- the first essential step to recovery.

Just last week, the Irish foreign minister told an audience in New York City that Ireland was on its way back -- pointing to international news coverage of the second quarter growth. Taoiseach Enda Kenny this week proclaimed that, "The reputation of this country both from an international economic commentary and from a political perspective has risen substantially in the last six months." Yet this same week, the CountryRep2011 global survey of national reputations saw Ireland's ranking drop from 14th to 17th this year. The Irish people themselves ranked Ireland 31st out of 53 countries surveyed.

We do the Irish no favors by using a one shot statistical analysis to justify austerity. Worse, Ireland's own government only risks its credibility when grabbing on to one indicator while not, instead, being brutally frank with its people and the world, steeling the public for what remains to come.

Sean Kay is professor of politics and government at Ohio Wesleyan University and a fellow in foreign policy at the Eisenhower Institute in Washington, D.C. He is the author of Celtic Revival? The Rise, Fall, and Renewal of Global Ireland.

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