Not much to celebrate this St Patrick’s day?
St Patrick’s Day has gradually shifted from a day of celebrating the arrival of Christianity to a general celebration of the Irish culture. But times have been rough for the Republic of Ireland of late and many might not seem like celebrating this year.
Ireland has experienced a come down from the high growth period of 1995-2000 (averaging GDP growth of 10%) where they earned the nickname of the Celtic Tiger. One of the biggest reasons for this growth was an especially low corporation tax – at around 12.5% – which saw social networking giant Facebook (among others) establish its international headquarters in Dublin (to escape heavy corporation tax in America).
Ireland’s troubles were exposed brutally in the world wide financial crisis, as they were the first nation to officially move into recession. An inability to change their monetary policy and devalue their currency meant they had no protection against the recession and were hit hard. The economy had been built on a housing bubble (similar to Spain) that promptly burst and left most of the public with huge debts they couldn’t pay. A statistic to back this up is Ireland’s household debt to GDP ratio which stands at an incredible 190%, the second largest in the world. In 2009 their economy shrank by around 7% and in 2010 it shrank by 1% (when most other countries had started recoveries), while the budget deficit for 2010 was a record high 32% of GDP. The Irish banks were heavily exposed by loans to property developers (losing an estimated €100 billion) and in 2008 the government had to issue bailouts, though an exchange for equity stakes in the banks was refused in fear of diluting shareholder value. Ireland’s government bonds took a hit as well, as investors grew nervous over Ireland’s ability to pay its debts and interest rates on the bond rose to high 9% (below only Greece at the time). This nervousness was started off by Standard and Poor (rating agency) downgrading Ireland from its AAA credit status to a single A credit status, with it transpired afterwards that costs were worse than thought and prompted Moody (another credit agency) to downgrade Ireland to “junk status” in 2011. The country had to be bailed out by the EU and IMF to the tune of €85 billion last year in exchange for new austerity measures.
Moving forward to this year, though the worst seems behind them, Ireland still have some problems to deal with. The budget deficit for 2012 is forecasted at 8.6% of GDP, the Irish public faces a referendum over the EU’s fiscal compact (which could see Ireland lose funding if voted “no”) and face unemployment at around 15% and youth unemployment at around 30%. The government is imposing tough austerity measures to try and cut debt; by slashing public service budgets (wages have been cut by 15%), raising sales tax to 23% (joint highest in Europe) and are aiming to get their budget deficit down to 3% by 2015. They also face mass emigration as disenchanted members of the public look for better opportunities in foreign lands, where unemployment is not so high and growth so little.
But there are positives for Ireland to concentrate on; before the crisis the government was actually running a budget surplus and doesn’t have a history of mismanagement, the country’s GDP per person in 2011 was still very high at around €35,000 (higher than Germany) and are showing signs of regaining competitiveness in their exports. The Irish public genuinely seem to agree with the government that austerity measures are the right way, despite unemployment rising and wages being cut. The current account returned to a trade surplus in 2010 and Ireland seems confident of beating the EU-set measures of a budget deficit of 3% by 2015 to try and regain confidence in the market. This looks possible as Ireland already beat the EU target of getting their budget deficit down below 10% early last year. Maybe the sort of fight being seen by Ireland’s economy can give its people something to celebrate this St Patricks day, as there doesn’t seem to be much else.