2013-01-08 06:04:04
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