In Europe’s grand battle over growth vs. austerity, has Ireland proved that austerity works?
The country successfully sold longer-term government bonds Wednesday, a sign that international investors regard its rebound as durable and that it will end its reliance on an international bailout program later this year. It would be the first euro-zone country to achieve that milestone. The economy is growing — slowly — despite a regional recession. Employment and foreign investment are rising.
Even as other European nations have considered slowing their drive to balance budgets so governments could borrow and spend more, Irish Prime Minister Enda Kenny has said the country will meet its promised European deficit targets in the next two years. In a telephone interview from Dublin, Kenny said the euro zone had been too often damaged by unmet goals for him to back off now.
“You call it austerity in one country, fiscal discipline in another, the consequences are still challenging,” Kenny said. In talks with international investors after taking office in 2011, he said the message was clear: Money would return when conditions in Europe became predictable again.
“They said what we need from people is clarity and decisiveness and a horizon against which to plan,” said Kenny, who visits the United States next week for St. Patrick’s Day in New York and talks with President Obama. “We went over the edge because of incompetence. We have tried to rectify that. It is working.”
Ireland’s sale Wednesday of roughly $6.5 billion in 10-year bonds is noteworthy for several reasons: The decade-long term means investors are reasonably confident the euro zone will stay intact and Ireland will remain part of it. The interest rate of 4.1 percent means the country is considered a better credit risk than much larger nations such as Italy and Spain.
But it is not clear whether Ireland stands as an example for the rest of Europe or stands as an exception, an island nation that fell into and climbed out of crisis through a particular set of circumstances.
Unlike the other bailout nations of Greece and Portugal, Ireland’s public debt was at a healthy level before a collapse in its banking system led Kenny’s predecessor to promise a rescue — and bankrupt the country paying for it. The country was not, in other words, hard-wired for high debt. And unlike nations such as France and Italy that have also hit the doldrums economically, Ireland’s tight connection to the global trading system helped it restore growth while those other countries fell into recession.
In a comparative study released Wednesday, the Institute for International Finance cited Ireland not as a case of strict austerity, but rather as a more tempered example of how budgets could be gradually brought into balance without wrecking the economy.
Officials at the International Monetary Fund, in other European capitals and elsewhere agree now that austerity should be carried out at a moderate pace — with balance between budget goals and the short-term need to keep money flowing through the local economy. In the early stages of Europe’s crisis, however, the emphasis was on deficit control at all costs.
According to the IIF study, Ireland’s bailout program found a sweet spot well matched to the nature of its economy. On average, annual changes in government spending and taxation cut about 1.7 percent from Ireland’s economic output between 2010 and 2012. Because of the country’s tight trade links and a fast decline in wages that helped restore its competitiveness, that was more than offset by a jump in exports. In addition, the IIF found, the structure of Ireland’s economy meant that every dollar reduction in government spending cost the economy less than a dollar of economic output — a key statistic known as the fiscal multiplier.
By contrast, in Greece, changes in government spending and taxes lopped more than 5 percent off of gross domestic product each year. Trade linkages in that country were not as developed, so exports did not offset the decline. Because the country relied more on local spending to drive its economy, each dollar reduction in government purchases or wages meant a loss to the economy of more than a dollar — partly accounting for the country’s downward spiral.
Kenny said it is accepted now among euro-zone leaders that the climb back is going to be protracted in some cases. The illusions of a quick fix — prominent in the early days of the crisis when top European leaders were trying to avoid bailouts of any sort — have been dispelled.
“There were situations that were allowed to drift for far too long. In the last two years, I do sense more clarity and trust around the table,” Kenny said. “I don’t like to say that austerity works, but we have taken significant elements out of our economy and it means people are doing more with less. People have changed. They understand that these efforts they make are helping meet the challenges and they can see the progress.”