Why Ireland Is The Miracle Of Europe

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Photo: Syunosuke via flickr

Numerous EU officials have recently lauded Ireland’s commitment to cutting spending and getting its economy back on track.This time last year the problems facing Ireland were incredibly serious — a gravely distressed Anglo Irish Bank and rapidly inflating borrowing costs spelled disaster ahead. But with 1.6% GDP growth last quarter and expected growth of 2% next year, Ireland seems to be the only one of the bailed-out or threatened nation to be on its way back to economic health.

Regardless of reservations raised about the sustainability of this growth — particularly if the global economy continues to go down the tube — Ireland’s recovery so far has been little short of extraordinary.

Then the Irish government decided to split up the ailing Anglo Irish Bank.

A real estate bubble compromised the Anglo Irish Bank's assets, quickly turning it into the country's most distressed financial institution.

The Anglo Irish Bank looked like it would cost the Irish government nearly $35 billion over 10-20 years before it decided to split up the bank into a funding bank and an asset recovery bank.

But before the EU/IMF bailout, things were still looking grim for Ireland.

Despite measures to help the Anglo Irish Bank, the whole Irish banking sector continued to suffer. A credit crunch for Irish banks compounded and credit default swaps on Irish sovereign bonds were going through the roof. The country finally admitted its banks needed help last November.

Ireland received nearly $113 billion in aid from the European Union and International Monetary Fund late last year in return for cuts to minimum wage, raising taxes, and spending caps. The money was used to recapitalize its fragile banking sector.

Moody's downgraded Irish debt to nearly to junk.

Ratings downgrades on Irish sovereign debt reflected the poor state of Irish affairs. Moody's predicted that rising public debt would continue to compound problems.

But a austerity measures and a new government helped drive recovery.

Spending cuts and tax increases of $29 billion -- equivalent to 13% of GDP -- put the Irish government on more stable financial footing, according to Reuters.

Fine Gael also took power from incumbent Fianna Fáil on February 25, 2011.

GDP grew at 1.6% in Q2 2011.

After three years of contraction, steady growth for the first half of 2011 suggests a turnaround in the Irish economy. GDP grew 1.6% in the second quarter according to the L.A. Times.

In comparison to Portugal (0% GDP growth in Q2), Spain (0.2% GDP growth in Q2), Greece (predicting a contraction of 5.5% this year), and Italy (which just lowered growth forecasts to 0.6% for the year), Ireland's numbers are remarkably positive.

Price and cost competitiveness has improved.

The National Competitiveness Council recently pronounced Ireland more competitive than last year, although it said work still needs to be done to address some concerns, according to the Irish Times.

The report saw falling labour and rent costs, increasing innovation, and high foreign direct investment per capita among the features of a competitive Ireland. However, it noted that the country could benefit from emphasis on reducing the costs of doing business, including legal fees and corporate property prices.

Solid export growth has bolstered the Irish economy.

Exports grew more than $2.5 billion -- or 23.9% -- from second quarter 2010 to Q2 2011, according to Tax-News.com. Several politicians have noted that this is fueling GDP growth.

Ireland is now paying less on its loans from the International Monetary Fund and European Union.

In July, EU leaders approved a reduction in the interest rate Ireland was paying on its bailout loans from about 6% to 3.5-4% and extended maturities on its loans as part of a greater EU debt agreement (which also included a second Greek bailout and an expansion of the EFSF).

According to Tax-news.com, the reduction in interest rates and extended maturity on Ireland's bailout loans means the country will pay about 3% less in interest on its debts.

Ireland is also seeing approval from the private sector.

Reduction in bond yields has reduced the premium Ireland has to pay on its debt. Yields on 10-year Irish bonds sunk below 8% on September 27 for the just the second time since last November, when it had to seek rescue funding from the IMF and EU, according to the Irish Independent.

Ireland has stayed out of the short term bond market recently, but announced plans to re-enter it by 2012.

But high exposure to the global economy — particularly in exports — threatens Ireland's recovery.

Finance Minister Michael Noonan said in the WSJ that Ireland wasn't likely to meet growth expectations of 2.5% in 2012, revising expectations downwards because of fears about the deteriorating global economy.

Domestic spending is not likely to pick up the slack, with a 3.6% decline in sales from January to August, as reported by the Irish Times. Retail sales declined by 3.1%.

See who else is nervously awaiting a resolution to the euro crisis.

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