Ireland springs back, but is still caught in a debt trap

Something is happening in Ireland: After the deepest recession since independence in 1921, it seems to be emerging from the trauma of the banking and fiscal crises with significantly positive indicators and with political leaders claiming an end to austerity.

Business and consumer confidence have hit highs not seen since 2006, with Dublin house prices rocketing again thanks to a lack of supply, and rising more moderately elsewhere. Exports are buoyant and unemployment is dropping to less than the EU average. Economic growth is significantly outpacing predictions and set to rise by almost 6% this year, the strongest in the EU.

All this is happening despite continued recession in key eurozone partners like France, Italy and even Germany. But Ireland cannot afford to see its domestic growth hindered by extended recession elsewhere, so its ‘lift-off’ is highly contingent on parallel recoveries in the eurozone.

The policies of the ECB will be crucial, and so too will be a deal to allow Ireland to re-finance its existing IMF debt at a substantially lower rate of interest. At the height of the banking crisis in November 2010, the Irish government was forced to negotiate an €85bn package of financial assistance, with €22.5bn of this from the IMF, €22.5bn from the EU Commission, €17.5bn from the European Financial Stability Fund and €5bn in combined bilateral loans from the UK, Sweden and Denmark.

EU finance ministers agreed in September 2014 to back Ireland’s bid to repay early the remaining €18bn in IMF loans. Spain had set a precedent when it was allowed to repay €1.3bn of its €40bn EU bailout package in July. Ireland is paying 5% on the IMF loan compared to 2.5% on the EU element, and by going back to the markets to take advantage of Ireland’s newly reduced borrowing costs, significant savings of around €400m could be made on the IMF loan tranche.

In June 2012 the European Council agreed to break the link between banking and sovereign debt, and that was held up by Dublin as a ‘game changer’. But Ireland’s campaign for retroactive bank recapitalisation via the ESM fund, still an objective of the Irish government, has not yet produced any significant concessions. Any agreement on early repayment of the IMF loans is likely to be seen across the EU as adequate special relief for Ireland.

The extraordinary debt burden on Irish citizens is illustrated by Eurostat figures showing that Ireland, with less than 1% of the EU population, shouldered 43% of the net cost of the banking crisis across all the other member states – €41bn out of a total of €96.2bn. As a percentage of Ireland’s GDP that equates to almost 26%. To put this in perspective, the next highest adjustment is 3.3% for Latvia. The cost of the bank bailout was €8,956 for every Irish citizen, compared to an EU average of €191.

The medicine prescribed by the EU-IMF ‘troika’ included swinging cuts in public sector pay, increases in income taxes and VAT rates and dramatic cuts in government spending. These budgetary measures added up to tax increases and spending cuts of more than €30bn, one of the largest budgetary retrenchments of modern times.

Today’s combination of debt relief and renewed growth may be the oxygen the Irish economy needs. But the social costs of the banking and financial crisis remain acute, and the challenge facing the government in Dublin is to restore a measure of social justice to a beleaguered population without departing from the eurozone’s rigid fiscal orthodoxy.