Ireland: fighting the crisis
The economic and financial crisis does not respect borders. It impacts on all of us in the European Union, and far beyond. The situation in Ireland is part of that wider European, and international, phenomenon. It is clear that the solution will also be found in that enlarged framework. That is why it is important that all of us in the euro area move quickly to put into effect the important measures agreed last July.
But we in Ireland also understand that each country must play its own individual part in restoring stability. The new Irish government, elected last March, moved rapidly to address simultaneously three major areas, namely the banking sector, public finances and the need for a parallel growth strategy.
Immediately on taking office the government announced, and began to put into effect, radical plans for the restructuring of the Irish banking system. This involved significant further capitalization of the banks, changes in the structures of the main commercial banks and a major overhaul of the regulatory process. The objective is to deliver a more robust banking system which can be an effective source of lending to the business sector.
On the public finances strenuous and, it must be acknowledged, painful efforts have been made to close the gap between our national revenues and expenditures. Corrective adjustments of some 21 billion euros, amounting to over 13% of GDP, have been implemented over the past four years, with some 3.6 billion euros envisaged for 2012. These are very substantial figures, but the Irish government is firmly committed to reaching our 3% deficit target by 2015. The team monitoring the implementation of the EU/IMF assistance program have strongly endorsed the measures taken by Ireland and have confirmed that program targets are being fully met.
The government recognizes that unavoidable austerity measures must be accompanied by a strategy for growth. To promote this objective, the government has taken a number of steps – targeted VAT relief in the labor-intensive tourism sector, steps to reduce labor costs and providing tax incentives for increased R and D.
The results are encouraging. The Irish economy experienced very strong growth in the first half of this year, with real GDP increasing by 1.9% and 1.6% in the first and second quarters respectively. This supports the view that the economy will record growth for the year as a whole, following three successive annual contractions. We anticipate growth of 0.8% in 2011, strengthening to 2.5% in 2012 and an average of 3% over the medium term. The positive trend is being underpinned by significant competitiveness improvements – wages and other costs declined by 6% in 2009/10, compared to a 4% increase in the euro area as a whole. This includes an average reduction in public sector wages of 14%. Lower costs have helped exports – vital for an open economy like Ireland. Exports rose by 6.3% in 2010, with good results continuing in 2011.
I am often asked how it has been possible to maintain social cohesion while pursuing these policies. I would say firstly that as a relatively small island nation, with a long trading and immigration tradition, Ireland and its people have always understood the concept of interdependence, and the realities of the world in which we make our way. More concretely, the modern Irish economy embodies a strong concept of social partnership, which has allowed employers, unions and government to reach important agreements covering not only wages but a range of economic and social policies. When the down-turn came these mechanisms remained in play, and provided a channel through which contacts could be maintained, notwithstanding the difficult decisions which had to be taken by government, including as indicated above, the imposition of significant pay cuts. This was also the backdrop to an important agreement last autumn which offered continuing industrial peace on the basis of assurances against future pay cuts, while providing for a broad program of structural reforms in state agencies and public services.
But perhaps the most powerful incentive for holding firm, and continuing to pull together as a people is the awareness that the program is working. We are already seeing positive results, and the benefits of facing the difficult decisions right at the outset:
- the banking system has been restructured and the basis for a reformed banking sector, working under appropriate supervisory arrangements, is now in place;
- industry and services have cut costs, thereby contributing to the strong export performance of the past two years, allowing a balance of payment surplus in 2010 and 2011;
- foreign direct investment continues to come into Ireland, attracted as always by the highly supportive business environment.
The World Bank‘s annual Doing Business report for 2011 ranks Ireland 9th out of 183 countries in terms of the ease of doing business. This makes Ireland the highest ranked euro area economy in the report. Productivity is a key determinant of long-term growth. Irish productivity grew strongly in 2010, when real GDP per employee increased by 3.9%.
None of this is to diminish the scale of the challenges we face nationally or, perhaps most importantly these days, together. But the government with broad support, has made clear that we will see this through. This is the right course for us, and for Europe.
