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File photo from May, 2012, of an unfinished housing development in Dublin. Next year, Ireland’s deficit is forecast to fall to 7.5 per cent, compared with Greece’s 4.7 per cent, Portugal’s 4.5 and Spain’s 5.7. (CATHAL MCNAUGHTON/REUTERS)
File photo from May, 2012, of an unfinished housing development in Dublin. Next year, Ireland’s deficit is forecast to fall to 7.5 per cent, compared with Greece’s 4.7 per cent, Portugal’s 4.5 and Spain’s 5.7. (CATHAL MCNAUGHTON/REUTERS)

Ireland’s ‘Celtic comeback’ is a myth Add to ...

In recent months, Ireland has collected a number of accolades from international media and policy makers. Much of this attention was focused on positioning Ireland as a success story of the European austerity drive.

The European edition of Time Magazine featured Irish Prime Minister Enda Kenny on the cover, with a headline reading: “The Celtic Comeback,” crediting his government for turning around the national economy. And since the disastrous EU summit last week, we have heard “Ireland is special” statements from both German Chancellor Angela Merkel and French President Francois Hollande. The “special” nature of Ireland, compared to Greece, Portugal and Spain, per Angela Merkel and Francoise Hollande, refers to the supposed success of government reforms in dealing with the fiscal crisis.

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This praise, however, is wholly undeserved and is serving to further detach the country and the EU’s leadership from reality.

Here are the facts.

Budget deficits: For 2012, Ireland is aiming to post a deficit of 8.3 per cent of GDP against Greece’s 7.5 per cent, Portugal’s 5 per cent and Spain’s 7 per cent.

Next year, Ireland’s deficit is forecast to fall to 7.5 per cent, compared with Greece’s 4.7 per cent, Portugal’s 4.5 and Spain’s 5.7. From 2010 to 2012, Ireland's structural deficit will have declined from 9.3 per cent of potential GDP to 6.2 per cent – a swing of 3.1 percentage points. The corresponding numbers for Greece are a drop from 12.1 per cent to 4.5 – 7.6 percentage points – more than double the rate of austerity in Ireland. For Portugal, the decline of 4.9 percentage points is more than 50 per cent deeper than in Ireland. Only Spain, with a decline of 1.9 percentage points, ranks behind Ireland. And in 2013, Ireland’s forecast structural deficit (5.38 per cent) will be worse than that projected for Greece (1.06 per cent), Portugal (2.28 per cent) and Spain (3.52 per cent).

Measured by the ability to control deficits, Ireland is plainly the worst-performing country in the euro-zone periphery.

Government debt: In 2010, Ireland’s government debt stood at 92.2 per cent of GDP. This year, it will be around 117.7 per cent – up 25.5 percentage points. In the same period, Greek public debt has risen from 144.6 per cent of GDP to 170.7 per cent, a rise of 26.2 percentage points. Portugal’s debt, which stood at 93.3 per cent of GDP in 2010, is up to 119.1 per cent, an increase of 25.8 percentage points. For Spain, the corresponding numbers are 61.3 per cent (2010) and 90.7 (2012) - a jump of 29.4 per cent.

So while Spain is clearly the worst performer in the class, Ireland, Greece and Portugal are basically indistinguishable from each other. In debt levels, Ireland and Portugal are worse than Spain, but better than Greece.

External balance: In 2012, Ireland is expected to post a current account surplus of 1.8 per cent of GDP, against deficits of between 0.15 per cent and 2.9 per cent for the other three peripheral countries. This, of course, is not the legacy of Irish reforms but of multinational corporations trading from their bases in Ireland. These multinationals account for 80 per cent-plus of Irish exports; and in 2011, some 90 per cent of Ireland’s trade surplus in goods stemmed from two sectors – pharmaceuticals and medical devices – neither of which have much to do with the economy managed by Mr. Kenny’s government.

Indeed, Ireland ranks as the worst performer of the four in terms of current account dynamics. Between 2010 and 2012, Greece will have reduced its current account deficit by 4.3 percentage points, Ireland will improve its external balance by 0.7 points, Portugal by 7.1 and Spain by 2.3.

The core problem with the accolades showered on the Irish government from abroad is that they further widen the gap between the Irish people, the real economy and the government. Of the peripheral countries, Ireland is the only one that has the potential for a full and sustainable recovery if the current private sector debt crisis is addressed at a systemic policy level. Alas, owing to the foreign praise, the government has largely abandoned robust reform of the banking sector and the 18th century-style draconian personal insolvency regime operating in the country. The snowballing crisis of mortgage arrears and the continued government drive to increase direct and indirect taxation are now forcing tens of thousands of skilled and entrepreneurially minded younger people out of the country.

The false praise of the “Celtic comeback” for “special” Ireland is part of the problem, not a welcome respite for the battered economy.

Dr. Constantin Gurdgiev is adjunct professor of finance at Trinity College, Dublin

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