Can Ireland show the way forward?
A year ago the failure of Irish austerity was widely expected. Irish interest rates were similar to Greece’s; public sector pay was cut by 5-10%; and social welfare payments were cut for the first time since 1924. As unemployment hit 14%, many liberal bloggers commented that contractionary fiscal policy was, well, contractionary. They expected budget cuts to lead to higher unemployment which would lead to lower consumer spending and more layoffs, perpetuating the cycle.
But a funny thing happened on the way the Armageddon: the Irish economy turned up. Ireland has had two quarters of stronger-than-expected growth, unemployment has stabilized, domestic demand is up, and borrowing rates are down. Their economic expansion is broad based, growing in the areas of manufacturing, agriculture, transport, and communications.
Does that mean we can save our way to prosperity? Not necessarily. The Irish economy is highly dependent upon exports. Half of Irish industrial production is computers and pharmaceuticals. Their residential and commercial real-estate markets, which had a much bigger bubble than ours did, remain stuck in the doldrums.
But it does point to one thing: Irish austerity did calm the bond markets. Amid the current discussion of a possible Greek default and ring-fencing bad assets, Ireland isn’t part of that picture. As the only English-speaking country in the Euro with a well-educated workforce and low corporate taxes, Ireland has a lot going for it.
Austerity has worked at other times. Let’s hope it does here. The Irish deserve that much luck.
Douglas R. Tengdin, CFA
Chief Investment Officer
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