1970-01-01 02:00:00
rlp
Jan 5th 2013 | from the print edition
ALTHOUGH the prospects for most of the euro zone s periphery remain dark, there
is a glimmer of hope in the west. By the end of 2013 Ireland could leave its
bail-out programme and stand on its own feet again.
An Irish recovery would provide a boost for Europe and its de facto leader,
Angela Merkel, the German chancellor, as much as for Ireland and its prime
minister, Enda Kenny. It would show that the controversial treatment of
austerity and structural reforms imposed as the price of bail-outs can work. It
would reassure the electorates of core Europe, especially German voters who go
to the polls in the autumn, that rescues do not condemn them to a never-ending
call upon their taxes, as seems to be the case with Greece. And a sustained
return by Ireland to the bond markets would boost confidence more generally,
helping other bailed-out economies such as Portugal and Spain.
Unlike the struggling countries of southern Europe, Ireland has a good story to
tell. Last year it dodged the euro zone s wretched recession. Unit labour costs
in the country have come down sharply, making the economy more competitive.
That has enhanced Ireland s allure for foreign companies, which continue to
favour the country as a manufacturing and services hub for international
markets, not least because of its low corporate-tax rate. These are useful
advantages. If things go well in 2013, Ireland might be able to leave its
programme without any further assistance.
Celtic hangover
But a happy ending is by no means assured. Ireland s very reliance on foreign
firms creates both economic and fiscal vulnerabilities. If global growth
falters this year, for example, Ireland will be hit hard because its exports
are bigger than the economy. Any economic setback will make it more difficult
to get the deficit down, as planned in yet another austerity budget (the sixth)
late last year. Even if things go to plan, public debt, which amounted to only
25% of Ireland s GDP in 2007, will exceed 120% in 2013; and once the large
slice of GDP which goes to low-taxed foreign multinationals is taken into
account, it will reach almost 140% (see article).
If things do go wrong, a debt burden of this magnitude could prove
unsustainable. That is why Ireland could do with a helping hand from the rest
of Europe. About a third of its public debt has been incurred bailing out its
banks, an imposition which Irish taxpayers resent bitterly. The Irish
government is largely to blame for that, because it issued blanket guarantees
to bank creditors at the height of the financial crisis in 2008. But European
leaders, scared about the repercussions of a default in the bond markets, later
forced the Irish government to protect the banks senior bondholders.
There are a couple of ways in which Mrs Merkel could help Ireland. The terms on
the promissory notes IOUs which the Irish government used in 2010 to prop up
its banks could be eased. A more effective measure would be to allow the
European Stability Mechanism (ESM), the euro area s permanent rescue fund, to
take stakes in the Irish banks that remain operational. That would help Ireland
both by removing some of its sovereign debt and by insulating the government
from any further calls on public funds as a result of more mishaps to Irish
banks. It would also help the euro zone by making concrete the undertaking by
European leaders last June to break the vicious circle between weak banks and
weak governments that has exacerbated the debt crisis.
Finance ministers in Germany and other core creditor countries subsequently
said that the ESM could be deployed in this way only in new rescues. It will be
hard for Mrs Merkel to shift course again, especially in an election year. But
the euro area must sooner or later deal with debt that is beyond the capacity
of individual states to cope with. Moreover, European creditors would be
rewarding Ireland for good behaviour for complying so well with all the
conditions that it is on course to leave the bail-out programme altogether.
That would stiffen the resolve of other rescued countries as they push through
unpopular measures. But the most compelling reason for Mrs Merkel to offer such
a concession is that Germany and the wider European economy would benefit, too,
as investors saw there was light at the end of a rescue. And with the euro zone
still mired in recession, it could do with all the light it can get.
from the print edition | Leaders