In recent weeks there has been a spate of good economic news emanating from Ireland. The most significant was that in the latest 12-month period, employment increased by around 3%, an exceptional and surprising turnaround in the labour market. This follows other good news on taxation receipts, retail sales and strong inward direct foreign investment.
Quite separately, Ireland exited the so-called bail-out without any backstop EU guarantee – and the Irish government capped all of this good news by raising money on the bond markets at the lowest rates for a decade, down dramatically from just two years ago. The country’s borrowing costs are now very close to those of the UK.
Two main things strike me about this. The first is that the turnaround in the real economy was predicted by no serious forecasting unit, and has taken everyone by surprise. Instead of talking about the economy flat-lining as was the case just a few months ago, we are hearing already about increased wage demands, tax reductions and increased state expenditure in certain areas in the year to come.
Second is the volatility and “starling-like” behaviour of financial markets. I have in the last four years asked my colleagues in the Psychology School repeatedly for an explanation, but even they cannot provide one. The fundamentals of the Irish economy four years ago were little different from what they are today: a stable democracy, a strong rule of law, market-oriented economic policies, good physical infrastructure, and a young, educated and adaptable labour force. As such, the high borrowing rates of a few years back were in a sense never justified – except in that it was thought that there was a good probability of the Eurozone imploding.
But this was never a real possibility, except in the minds of some British and other media commentators and politicians who never fully understood that the Euro is fundamentally a political as much as an economic project. It was agreed by the allies as the price of German reunification in the early 1990s, which in turn related back of course to seismic negative events in the middle of the 20th century. Indeed, the economic, political and social consequences of a Euro implosion were always too terrible to contemplate; and since the financial crisis broke, three new countries (albeit all very small ones) have joined the eurozone, with none being forced or trying to exit.
However, the media and financial markets’ euphoria over Ireland’s economic resurgence is also over-egged.
No room for Eire
There has been progress in the state of Ireland’s public finances and restored competitiveness, but this was a simple prerequisite for the country’s survival: it is as simple as that. There is still a large public debt problem to be addressed, both in terms of annual deficits and accumulated debt. There is also a high unemployment rate, though it is down on the rates of two years ago.
Further reductions in the number of unemployed will be much more difficult to come by, especially given how much of that figure consists of the long-term unemployed. And there are still very serious distributional issues related to the economic crisis, especially with regard to large mortgage arrears and negative housing equity – both of which have a strong relationship to intergenerational inequity.
While there has been some reform of the Irish public sector, it has probably been nothing on the scale of what is required if Ireland is to continue to compete in a globalised world. And competitiveness gains can be so easily and quickly turned into losses, as happened in Ireland between 2002 and 2007.
Ultimately, membership of the eurozone is central to Irish economic and political thinking. Such membership brings opportunities, both economic and political, the latter in terms of influence and a much wider focus than the traditional emphasis on the UK alone. It also brings constraints and responsibilities. The economic reality of how to perform successfully in a currency union is only now being realised, unlike when Ireland joined the eurozone in 1999.
It is also much more fully understood now that we cannot simply shift from blaming Britain for our economic failures (as we did so often in the past) to scapegoating the EU. This very small country must continue to change if it is to develop into a mature player in the globalised world – both as a committed member of the EU, but also taking full responsibility for its own successes and failures.