Monday, March 8, 2010

They really like us

A piece from last week’s Los Angeles Times is headed Irish public pays a price for nation's fiscal austerity but the general impression is of an economy that has ‘turned the corner’ and is a ‘shining light’ when compared to some of our EU colleagues.

Some excerpts:

The outside world applauded last December when Ireland unveiled its harshest budget in a generation. Stinging cuts and higher taxes were needed to tame a runaway public deficit and give the limping Celtic Tiger some of its roar back, officials said.

Three months later, Ireland has become something of a poster boy for good behavior in bad times, held up as an example to Europe's other debt-laden economies, particularly Greece.

Officials say they had no choice but to inflict painful cuts in order to start bringing down a whopping deficit of about 12% of gross domestic product, far in excess of what's allowed under rules for the 16 countries that use the euro. The nation's total debt is about 47.4% of GDP.

Although international markets greeted the austerity plan favorably, as an indication that Dublin was serious about reining in its deficit, opinion at home hasn't been so kind.

Indeed, economists around the world cite Ireland as a positive counterpoint to Greece, which is also grappling with a debt crisis that has threatened the stability of the euro.

Where Athens concealed its financial woes for years, Dublin copped early to its deficit and took emergency action to stop the rot. Greece's credibility has been shredded, enough that the European Union has essentially put the government there under supervision; Ireland has managed to repair some of the damage to its reputation and maintain its independence.

The piece does go on to cite some examples of domestic disharmony with the policies enacted, but the general perception of a positive international reaction is developed further.  Why is this?

There is nothing to suggest the budget deficit is been brought under control.  Tax revenues continue to fall.  Expenditure cuts are being offset by increases in social welfare payouts.  Our deficit may be worse this year than last.

We are applauded for not concealing our financial woes.  Yet the NAMA experiment is ‘off-balance sheet’.  The quoted Debt/GDP ratio of 47.4% will not increase once €54 billion is spent to buy distressed loans from the banks.  Including this would bring out debt ratio to about 85% and the ongoing deficit will see this race past 100% in the next 18 months. 

There is no doubt that this international perception is good for Ireland and our borrowing costs, but in order to ensure it doesn’t evaporate we will have to live up to it at some stage. There is no sign of that happening yet.

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