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Ireland: A Model in Austerity

Ireland has provided a model of austerity for states enduring economic misfortune. It is now up to its fellow Eurozone members to follow its lead

When historians of the future look back on the current Eurozone crisis, it is unlikely that many will eulogise about Ireland as a model of economic governance. The tiny island state on Europe’s northwest corner saw its government debt spiral out of control in the years leading up to the credit crunch and even several years after the initial crash, it still owes more per capita than does Greece – the current yardstick for all of Europe’s debtor nations.

Certainly, authors of the future who line up to pass judgment on former Irish premier Brian Cowen and his predecessor Bertie Ahern will be justified in handing out damning verdicts – through laissez faire administration and lax regulation, the country’s banks were allowed to rack up unprecedented levels of debt, precipitating an intervention first on behalf of the Irish state then, ultimately, on behalf of the IMF and the EU. That the bailout required was amongst the very largest in the developed world was in one sense an impressive achievement; Ireland, with a population of only some four million, had managed to out lend both American and British banks - hardly prudent institutions in the years leading up to 2008.

But when people do look back on Ireland’s Celtic Tiger years, they will also have to temper their condemnation with a caveat: Ireland’s austerity programme since its prodigious fall has been amongst the most well thought-out and most effective the world has yet seen.

In the year since Ireland’s bailout by the IMF, some €2 billion of spending has been slashed from the government balance sheet with a further €1.6 billion planned for 2015 – not bad, in a country with a diminishing GDP which currently stands at a modest €170.94 billion.

All parts of the civil service have taken part in the squeeze with healthcare, pensions and welfare all coming under the knife over the last few months. The country’s children – hardly guilty parties in landing the country in its financial quagmire – have made some of the biggest sacrifices of all; Ireland now has the fourth lowest spend per child in the OECD.

Perhaps more impressive has been the attitude of ordinary workers in dealing with austerity – the imposition of an 11.5% cut to the minimum wage was met with barely a ripple of protest, and certainly not with the outward displays of public anger which greeted similar announcements in Greece.

That some of the country’s poorest people are prepared to see a significant reduction in their income is testament to the resolve shown by the country since the dark days of the winter of 2010, when the population experienced a shock at least as painful as that undergone by Greece.

But the most telling tribute to Austerity Ireland has been demonstrated by its virtual anonymity when it comes to discussing who is to blame for the current debt crisis. When commentators compile lists of European basket cases, the country is markedly absent. PIIGS have become PIGS, and ‘Southern Europe’ is no longer a general term for states chastised by Bundesbank board members – it is once again a geographical entity (albeit one which still consists mostly of debtor nations).

The significance of this change in attitude towards Ireland should not be underestimated. The country has shown that a deep austerity programme really can work, and within a relatively limited timeframe too. It serves as a model for the newly installed technocratic prime ministers of Greece and Italy, although only if these leaders take on board the lessons learned in Dublin that have allowed its cuts programme to work.

The first of these is undoubtedly that austerity is a painful process, no matter how hard governments try and mitigate it. Ireland’s cuts package only really begun to convince once it became clear that citizens and ministers alike were aware of what an austerity programme would mean for them and were prepared to go through with it anyway.

This meant headline-grabbing initiatives such as substantial increases in income tax, an 8 per cent reduction in public sector jobs and massive bank levies – a concept with which protestors in Athens’ Syntagma Square have really struggled.

To understand the pain – and the fortitude – of the Irish people, all it takes is a short drive from Dublin’s airport to its city centre, a journey which takes the traveler past countless deserted construction sites. These ‘ghost towns’ - monuments to the country’s decade of reckless spending – are unlikely to ever be completed and are a reminder that the bottom has fallen out of Ireland’s property sector meaning that ordinary homeowners are unlikely to ever recoup their investment in their homes. As if to add to the pain, government intervention to help boost demand – such as the cuts to VAT introduced in neighbouring Britain – are simply not an option.

The second lesson is that strong governments are the only way to ensure that markets do not lose faith in a country’s leadership. For all the talk of externally imposed regimes in Greece and Italy, the reality is that times of public indebtedness are times of emergency – it is no time to muse on the merits of democracy. In spite of its economic crisis, Ireland’s parliamentary democracy has continued to run like clockwork – its current executive has a strong mandate and its recent Presidential election was one of the most predictable plebiscites ever. Although the incumbent Mary McAleese retired, the run off was only ever between a handful of candidates, none of whom was particularly controversial.

Such events have done a great deal to restore confidence in Ireland – and similar scenarios would be a great relief to money lenders everywhere were they to occur in Greece and Italy.

Finally, and most positively, comes the point that some luxuries can be protected by governments imposing austerity programmes and it is often useful to do so. For Ireland, this has meant protecting the 12.5% corporation tax rate designed to attract multinationals to its shores, even at the cost of upsetting France and Germany who have lobbied strongly for the imposition of a rate more in line with Ireland’s European partners.

Yet Ireland’s ministers have stuck firmly to their guns, arguing that a reduced corporation tax rate is of vital importance to their future growth strategy. This has necessitated deeper cuts elsewhere but it has had the added bonus of ensuring that Ireland’s sovereignty remains undisputed, whatever dark theories abound about a Groupe de Francfourt taking over the running of debtor Eurozone nations.

Of course, understanding the lessons of austerity and implementing them are two quite different things. European leaders, even technocratic ones with PhDs in Econometrics, are generally hamstrung by their electorates when it comes to imposing austerity.

Yet if Ireland’s example is anything to go by, dragging a population along with cuts programmes is possible, even if it requires some tough love. The sooner Eurozone leaders recognise that fact, the better for all of us, including the citizens of Greece currently protesting in Syntagma Square.

by Thomas Thatcher