Ireland: light at the end of the tunnel

Ireland is known as the “poster child for austerity”, says Jamie Smyth in the Financial Times. It has managed to implement €28.5bn of tax rises and spending cuts, meeting the conditions of its bail-out package, while continuing to grow its economy and maintaining social cohesion.

Lower wages and prices, along with a flexible labour market and still-low corporation tax, have greatly improved competitiveness. The IMF expects growth to have reached 0.4% in 2012. The hope is that Ireland, which entered its bail-out programme in 2010, will be able to make a full return to the markets by the end of the year.

However, “it wouldn’t take much for the eurozone’s model pupil to fail to graduate from its rescue programme”, says The Economist. Ireland is completely reliant on exports to bolster GDP as the domestic economy “remains traumatised” by household debt of 209% of disposable income and a credit squeeze in the shattered banking sector.

But the lacklustre European and global economies have reduced year-on-year export growth to 2% since the spring, the slowest pace since they began to recover almost three years ago.

If the world economy softens further, growth could be snuffed out, making it impossible to reduce the deficit or get on top of the overall debt pile, worth over 120% of GDP. If this looks likely, the rest of Europe should cut Ireland some slack, preferably by making it easier for it to cope with the debts racked up by its banking sector, which account for most of the public debt.

In Ireland’s case, more help would be “a reward for good behaviour”. That would “stiffen the resolve” of other struggling states and encourage investors in Europe, who would see “light at the end of a rescue”.

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