Is There Light At The End Of The Tunnel For Ireland’s Economy?

September 30^th, 2008 was a black day of Kafkaesque proportions for Ireland’s economy. It was on that inauspicious day that the government cloaked the country in shadow when they decreed that there would be a near-blanket guarantee to the senior bondholders of Ireland's six domestic banks: "the blackest day in Ireland since the civil war broke out," Ireland's incumbent minister of finance, Michael Noonan, remarked retrospectively. Indeed, that fateful decision made by the government on the 30^th December has become a watershed moment in Ireland’s short history as a free and sovereign state; a decision which has seen Ireland struggle economically as well as having its sovereignty called into question in the face of dictates’ issued by the IMF and its deputy director Ajai Chopra.

Ireland’s once confident swagger as the “Celtic Tiger” in the European Economic revolution has long since diminished; it’s roar reduced to an attenuated whimper. When the times were good Ireland’s economy behaved like an insouciant adolescent, throwing money to the wind as if money was going out of fashion; when the hard times hit, Ireland like Oliver Twist returned to the money markets and held out it’s bowl asking for “More, Please”, only to find out that our credit rating has plummeted to just above junk status and the capital markets aren’t so generous with their gruel anymore: “this time it’s gonna’ cost ya,” they tell us.

Despite Ireland’s misbehaviour, Europe still has a place at the table for its prodigal son; and they are hoping that by taking its medicine Ireland can set a good example for its impish siblings, vis. Italy, Spain and Greece and Portugal, and maybe, just maybe there might be a case for optimism.

After severe recession in 2009, the ‘OECD Observer’ noted signs of the Irish economy reaching a turning point; with austerity measures beginning to redress the imbalances caused in the Irish economy by reckless bank lending, a bursting property bubble and a toothless regulator. There has been an upsurge in external factors driving the recovery; most notably, the contribution of exports to growth has been precipitated by a return to competitiveness facilitated by a lower cost of living and decrease in inflation. The previous government’s decision to guarantee the banks has been somewhat validated because the injection of public funds into the banking system has allowed important sources of credit to seep back into the financial sector again.

Michael Hasenstab, writing in the Wall Street Journal exalts Ireland’s response to our economic problems, stating that “Ireland’s economic recovery could offer other indebted nations some inspiration for solving their own financial crises, the robust export performance of which has more than offset the ongoing adjustment in its domestic economy.” Allied to Ireland’s burgeoning success in the export market is the amount of foreign direct investment Ireland has been able to attract. Ian Curley, CFO of Dublin based Smurfit Kappa Group, a $9.3 billion dollar packaging firm that has been a regular member of the Iseq 20, the Irish stock exchange’s benchmark index, has remarked that the firm managed to outgrow the domestic market in Ireland, and this was in no small part due to 90% of its funding coming from outside Ireland. Similarly, another case in point is made by Dermot Mulvihill, group finance director of the Kingspan Group, a $1.7 billion Irish building-materials company that is also among the ISEQ 20, Mulvihill explains that in 2005, Ireland accounted for 18% of Kingspan's revenue, or about €200 million. Things have changed, however, last year, revenue in Irelandwas about €60 million, only about 5% of group worldwide sales. "When I'm modelling in terms of the group, with a time frame of three to five years, it looks very unlikely that much of that will come back, which is why we have moved to a geographically diversified model where 95% of our sales now come from outside of Ireland," says the finance chief.

In the late 1990s, Ireland’s relatively low corporate tax rate (currently 12.5%) and its highly educated workforce made it a hotbed for multinational investment, in later years foreign investment in Ireland began to wane as businesses expeditiously ditched Ireland in favour of cheaper European countries such as Poland and Hungary who were ratcheting up their efforts to compete for FDI. Ireland’s ability to attract FDI has never been in doubt, however, we soon became victims of our own success; as more and more businesses accumulated, competition for land and labour began to intensify which was the catalyst that sparked spiralling property prices and exorbitant wage demands. According to EU statisticians, Ireland was ranked second, behind Denmark in terms of average gross hourly wages among the EU's 27 member states, at almost €21 per hour. Ireland’s casino economy was playing a high stakes game, with property prices soaring higher than the Spire, gambling that they would soar still further, it wasn’t long before real estate on Dublin's tony Grafton Street peaked and surpassed rivals in Hong Kong and London on the list of most expensive retail locations in the world!

With the bursting of the real estate bubble, says Fergal O'Brien, senior economist of the Irish Business and Employers Confederation (1BEC), a period of retrenchment and sober reality has seen Ireland “pricing ourselves back into the market.” From 2008 through 2012, Ireland'sunit wage costs will fall about 9%, while increasing nearly 4% on average across the euro zone. As for real estate, property adviser Cushman & Wakefield says prime rents fell across Ireland by almost 20% last year.

Twenty-four years ago, the Economist remarked that Ireland was the “poorest of the rich”-a reference to Ireland’s poor economic standing in relation to the rest of North-West Europe. Back then, as of now, Ireland was ravaged by an economic maelstrom with massive numbers in unemployment and a balance of payments problem that would set any finance minister reaching for an analgesic. Like the 80’s, manufacturing and construction are once again suffering from significant decline, with little projected growth expected in these areas. With mirror like symmetry, the government’s schematic for economic recovery matches that of the erstwhile government of the 80’s; they have targeted FDI and a number of key industries as the potential harbingers of prosperity: agri-foods, mari-culture and tourism have been earmarked to help Ireland get back on its feet. It seems that Ireland has a nostalgic predilection for reverting back to our roots in a time of crisis; let us hope Europe’s “comeback kid” does not depart from their roots again.