Letter from … Dublin: Much done – but much more to do
In 2002, Fianna Fáil, historically Ireland’s dominant political party, won a general election on the slogan “Much done, more to do”. Ten years and one boom and bust later, those words hang heavy around the necks of the then-opposition parties Fine Gael and Labour, which now face some very tough decisions after forming a coalition government last year.
Ireland was in recession as recently as the fourth quarter of 2011 and has been teetering on the brink of negative growth at times this year. The International Monetary Fund (IMF)/European Central Bank (ECB)/European Union (EU) troika that approved the country’s €85 billion (approximately $110 billion) bailout in 2010 are pushing for Ireland to reduce its debt more rapidly at a time when many Irish citizens feel they have already been squeezed too hard.
Good news is in short supply. The Central Statistics Office’s preliminary estimates for the second quarter of 2012 show zero growth in GDP compared with the first three months of the year.
According to the Economic and Social Research Institute, unemployment will remain at 14.8% this year and will fall only slightly to 14.6% in 2013, and this does not take account of the many thousands of people who have left the country to look for work abroad. The number of long-term unemployed is a particular cause for concern.
The cost of doing business in Ireland has fallen since the start of the global financial crisis, but the country managed only 27th place in the World Economic Forum’s Global Competitiveness Report 2012-13. In 2001, Ireland was ranked 11th.
Of even greater concern to businesses: Banks are not lending. Rather than using money coming in from mortgages and other loan repayments to finance new loans, they are putting it towards the tens of billions of euros owed to the ECB.
The highest profile business failure in Ireland is the Quinn Group, a privately owned business with interests in construction, financial services and manufacturing, which at its peak was worth as much as €5 billion (about $6.5 billion).
There is hardly a business in Ireland that is not suffering. Retail insolvencies increased by 77% between July 2011 and July 2012 with industry group Retail Ireland suggesting the value of the market has shrunk by more than one-fifth since the start of the recession. While 350 jobs appear to have been saved by a deal to acquire one of Ireland’s most famous department stores – Clerys – about 50,000 others across the country have been lost since 2007.
The banking crisis decimated the construction industry, bringing down major developers McNamara Construction and Bowen Construction with the loss of thousands of direct and indirect jobs.
Ireland has been negotiating with the IMF/ECB/EU troika to ease the burden of its debt repayments by lengthening the term of its loans and/or reducing the interest rate. If these talks prove successful, they might improve Ireland’s debt rating and, therefore, the creditworthiness of Irish banks. This would improve the banks’ chances of attracting the corporate deposits they need in order to start lending again.
The export sector has been described as an Irish good-news story since 2008, but even there the prognosis is uncertain. Ireland’s share of the global goods and services export market has fallen by more than 25% from its peak a decade ago. And while pharmaceuticals, in particular, continue to generate considerable employment and revenue, the expiration of key patents over the coming decade will inevitably impact the sector, which accounts for about one-third of GDP.
Then there is the ongoing controversy over the use of Ireland as a jurisdiction for reducing tax exposure by major US corporations. Ireland has, thus far, managed to repel corporation tax harmonisation efforts at the EU level, but even if Ireland retains its 12.5% corporate tax rate, changes to the US tax environment could render current accounting practices less attractive.
With serious budget decisions facing the US government in the coming months, there is every possibility that renewed efforts will be made to “bring home” the billions of dollars lost from firms paying tax in lower-tax jurisdictions.
Irish Prime Minister Enda Kenny is reluctant to take the advice of the panel of independent economists established by his government that almost €2 billion (about $2.6 billion) in additional cuts should be implemented over the next three years, suggesting that the cuts outlined in the troika bailout programme would suffice.
Yet the European Commission, in a review of Ireland’s bailout programme, highlighted the scale of the economic problems facing Ireland in its latest growth forecasts, referring to the lack of recovery in banks’ profitability as “a source of concern” and suggesting that since “there are no low hanging fruit left … the needed consolidation efforts are likely to require difficult political choices.”
The mere suggestion that reducing spending by €2.25 billion (about $2.9 billion) and increasing taxes by €1.25 billion (about $1.6 billion) in December’s 2013 budget, to be followed by savings and a new taxes package totalling €3.1 billion (about $4 billion) in 2014 and €2 billion (about $2.6 billion) in 2015, might not be sufficient to restore Ireland’s economy to an even keel is enough to make every business pause for thought.