Ireland’s financial pain

DUBLIN – As
Europe’s major economies focus on belt-tightening, they are following the path
of Ireland. But the
once-thriving nation is struggling, with no sign of a turnaround in sight.

Nearly two years ago, an
economic collapse forced Ireland to cut public spending and raise taxes, the
type of austerity measures that financial markets are now pressing on most
advanced industrial nations.

“When our public finance
situation blew wide open, the dominant consideration was ensuring that there
was international investor confidence in Ireland so we could continue to
borrow,” said Alan Barrett, chief economist at the Economic and Social Research
Institute of Ireland. “A lot of the argument was, ‘Let’s get this over with
quickly.”’

Rather than being rewarded for
its actions, though, Ireland is being penalized. Its downturn has certainly
been sharper than if the government had spent more to keep people working.
Lacking stimulus money, the Irish economy shrank 7.1 percent last year and
remains in recession.

Joblessness in this country of
4.5 million is above 13 percent, and the ranks of the long-term unemployed –
those out of work for a year or more – have more than doubled, to 5.3 percent.

Now, the Irish are being warned
of more pain to come.

“The facts are that there is no
easy way to cut deficits,” Prime Minister Brian Cowen said in an interview.
“Those who claim there’s an easier way or a soft option – that’s not the real
world.”

Despite its strenuous efforts,
Ireland has been thrust into the same ignominious category as Portugal, Italy,
Greece and Spain. It now pays a 3 percentage points more than Germany on its
benchmark bonds, in part because investors fear that the austerity program, by
retarding growth and so far failing to reduce borrowing, will make it harder
for Dublin to pay its bills rather than easier.

Other European nations,
including Britain and Germany, are following Ireland’s lead, arguing that the
only way to restore growth is to convince investors and their own people that
government borrowing will shrink.

The Group of 20 leaders have set
that in writing vowing to make deficit reduction the top priority despite
warnings from President Barack Obama that too much austerity could choke a
global recovery and warnings from a few economists about the possibility of a
much sharper 1930s-style downturn.

“Europe is in a tough bind,”
said Kenneth S. Rogoff, a former chief economist at the International Monetary
Fund and now a Harvard University professor. “If you want to escape default,
the Irish path is the only way to go. But the Ireland experience points to the
profound challenges that the current strategy implies.”

Politicians here have raised
taxes and cut salaries for nurses, professors and other public workers by up to
20 percent. About 30 billion euros ($37 billion) is being poured into zombie
banks like Anglo Irish, which was nationalized after lavishing loans on
developers.

The budget went from surpluses
in 2006 and 2007 to a staggering deficit of 14.3 percent of gross domestic
product last year – worse than Greece. It continues to deteriorate. Drained of
cash after a U.S.-style housing boom went bust, Ireland has had to borrow
billions; its once ultra-low debt could rise to 77 percent of GDP this year.

“Everybody’s feeling quite sick
at what happened because things were going so well for Ireland,” said Patrick
Honohan, the Irish central bank governor. “But we don’t have the flexibility to
do a spending stimulus now. There’s no one who is even arguing for it.”

Honohan predicts growth could
revive to a rate of about 3 percent by 2012. But that may be optimistic:
Ireland, as one of the 16 nations in Europe that has adopted the euro as its
common currency, is trying to shrink the deficit to 3 percent of GDP by 2014, a
commitment that could weaken its hopes for recovery.

These
troubles sting many Irish, given the head start Ireland has on most members of
the euro club. Its labour market is one of Europe’s most open and dynamic.
After its last major recession in the 1980s, it lured knowledge-based
multinationals like Intel and Microsoft – and now Facebook and Linked-In – with
a 12.5 percent tax rate, giving Ireland one of the most export-dependent
economies in the world.

Now, the government is pinning
nearly all its hopes on an export revival to lift the economy. Falling wage and
energy costs, and a weaker euro, have improved competitiveness.

Turning statistics into jobs,
however, will be a herculean task.

“Exports alone don’t drive a
significant number of jobs,” said Paul Duffy, a vice president at Pfizer in
Ireland.

Wage cuts were easier to impose
here because people remembered that leaders moved too slowly to overcome
Ireland’s last recession. This time, Cowen struck accords swiftly with labour unions,
which agreed that protests like those in Greece would only delay a recovery.

But pay cuts have spooked
consumers into saving, weighing on the prospects for job creation and economic
recovery. And after a decade-long boom that encouraged many from the previous
years of diaspora to return, the country is facing a new threat: Business
leaders say thousands of skilled young Irish are now moving out, raising fears
of a brain drain.

David Stronge returned to Dublin
in 2006 from an architecture job in Britain.

“I
wanted to come back here and get a piece of this action,” he said. “And I did
for about a year. But then it started to tank.”

He
moved to reinvent himself, returning to school with thousands of other Irish,
in hopes that a higher degree would lead to better prospects. Stronge plans to
seek alternative energy jobs in Britain once he gets his master’s degree in
August.

“Ireland
isn’t going to spend on infrastructure probably for another 10 to 15 years,” he
said. “So you have to go to where the opportunities are.”

At
the D Cafe, a sandwich shop facing a stretch of empty buildings in Dublin’s
Docklands enclave, even that dream seems impossible.

“If you’re self-employed and lose your job, you’re entitled to
nothing, not even the dole,” said Debbie, the owner, who would only give her
first name.

She transformed her convenience
store into a deli when Liam Carroll, a property baron, threw up the nearby
developments. But the tenants never came, and her business evaporated.

“It’s so destroying,” she said,
gazing out the window. “We all live day by day, and we don’t know when it will
ever pick up.”

Signs of the decline encrust
Dublin’s streets. Boisterous crowds still mash onto the cobbles of Temple Bar.
Yet farther out, “To Let” posters obscure the hollowed shells of once-vibrant
cafes and clothing shops.

Fifteen minutes north of the
city centre, hulks of empty buildings form stark symbols of why Ireland must
now hunker down. At Elm Park, a soaring industrial and residential complex, 700
employees of German insurer Allianz are the lone occupants of a space designed
for thousands.

In the impoverished Ballymun
neighbourhood, developers began razing slums to make way for new low-income
housing. Halfway through the project, the financing dried up, leaving some
residents to languish in graffiti-covered concrete skeletons. “Welcome to
Hell,” read one of the tamest messages.

Now the government is debating
whether to demolish developments it inherited from the banks it nationalized
and restore them to green pasture.

A bitter sense of regret
punctuates chatter at any Irish bar, where the topic often turns to vilified
bankers and politicians, or the latest jobless figures.

While no one is marching in the
streets, the Irish do have a tipping point: Prime Minister Cowen, whose
popularity has plummeted, agreed last week not to cut public wages again in the
next budget. Many voters, having experienced the pain of austerity, are
expected to express their anger in the 2012 elections.

“Then,” said Paul
Sweeney, economic adviser to the Irish Congress of Trade Unions, “the Irish for
once are going to have their revenge
served cold.”

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