The general view about Ireland’s future is at best summarised as guarded optimism. At the core of this cautious outlook is the fact that the country had allowed its banks to grow five times the size of its economy and now both lay in a shambles.
Today, a great level of self-realisation has set in. Much like a recovering alcoholic, Ireland has taken the first big step to rehabilitation — admitting its flaws. In candid statements, both Prime Minister Brain Cowen and Finance Minister Brian Lenihan have squarely blamed the over-zealous banks for the current crisis.
It was, therefore, only natural for the government to start rebuilding its economy by right-sizing its banking system. The Euro 85 billion support from EU-IMF will also ensure that this is done as soon as possible. The country’s fourth-largest bank (among the six) ECB is already in talks with two investors, one a US private equity Carlyle Group for possible sale or alternatively merge with the country’s third largest bank Irish Life and Permanent. There are also talks about the phased closure of Anglo-Irish Bank which is believed to be needing Euro 35 billion to make good its losses. In five years, the Irish banking system will be reduced to three to four banks from six now.
Exporting its way out of the crisis
Right-sizing the banks is, however, only a part of the jig-saw puzzle. The real recovery will be achieved by putting great thrust to the country’s exports including widening of its markets beyond Europe and the US.
The core of the recovery will be export-led, says the 13-year old government led by Prime Minister Brain Cowen. The National Recovery Plan announced in the last week of November says exports from Ireland are expected to rise by 6 per cent over last year.
Ireland is a 4.5-million strong country which is about one-fourth the size of the National Capital Region in India. Its economy is primarily supported by exports, which today accounts for 80 per cent of its GDP. Information technology and pharmaceutical industries are the largest exporters from Ireland. Ireland incidentally also has the largest number of US FDA-approved plants outside the US. Food, retail and logistics also account for a sizeable portion of its export today.
The 12.5 per cent factor
Ireland’s export strength is also very closely tied to its foreign direct investments. Nearly 70 per cent of its exports is done by companies that have come to Ireland in the FDI route. An estimated 50 per cent of workforce in the island are employed by these exporters. This simply explains why Ireland refused to negotiate any upward revision in its 12.5 per cent corporate tax, which could have been a major detriment in attracting FDIs into the country.
At the peak of the negotiations with EU-IMF, the country did face some pressure from France and Germany to raise its corporation tax to provide a level playing field for other EU partners. “At some point, Germany and France realised that this would only make Ireland weaker and thus compromise Ireland’s ability to pay back its loans,” said a Dublin-based political analyst.
Cost competitiveness
The 2011 budget, announced yesterday, also assiduously focused on keeping Ireland’s business competitive. For example, VAT raises were committed only beyond 2013, thus giving breathing space for exporters to focus on growth.
Fergus Murphy, CEO of EBS, says Ireland must benchmark its vital numbers to the 2003 levels in terms of costs and competitiveness. That was a virtuous position Ireland was in seven years back, says Murphy. “It is still a good economy. We have the Anglo-Saxon legal system, domestically educated English-speaking workforce, strong FDI incentives and a very low tax regime.”
David Carthy, chairman of Dublin-based Ireland India Business Association and partner in law firm William Fry, says: “Ireland is an open, non-protectionist, globalised economy. We are a trading and export-driven country which relies heavily on both the talent and productivity of our people and our business friendly laws and tax regime.”
Overpaid public servants
Critics, however, are also questioning the present government’s decision not to touch civil service pay and pension. The civil service, apart from the bureaucracy, also includes health service and education administrators etc. As a group, this has over 300,000 members and a massive vote bank no government wishes to antagonise, least of all a very unpopular coalition government led by the Fianna Fail party. In 2002, the government had agreed to massive rescaling of civil service pay and pension benchmarking it on private sector scales. Today despite a fall in private sector pay, government servants have managed to stick to their higher salaries, which some today estimate is 30 per cent above their private sector counterparts.
In 2008, this group had negotiated a pay freeze with the government, that is known as the Croke Park Agreement, on the condition that it would bring in economies in other ways. A failure on the part of the civil service to achieve these economies is likely to force the government to revisit the pay-scale structure.
“It’s present continuous and not something that is done and dusted,” said an analyst, insisting that even a new coalition government with Labour in it would not be able to resist this change should its hand be forced in the interest of the overall economic welfare.
The Euro 6 billion annual cost savings announced in the budget yesterday is only the first baby step towards a full recovery. Even the most optimistic among the Irish are not expecting a full recovery in less than three years. The only sliver lining, if one wishes to see, in all this mess is that Ireland has learnt its lesson in the harshest way possible and that gives enough reason to sustain its competitiveness in the years to come and regain its lost “Celtic tiger” status.
(This is the third and final part of the series on the economic crisis in Ireland)
