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John FitzGerald : Tough budgetary measures in Ireland, an example for the Greeks

The slowdown in the global economy combined with the bursting of the property bubble marked the end of the boom years of the Celtic Tiger era. Other eurozone countries, namely Greece, Spain and Portugal, are also battling large deficits and mounting public debts. Touteleurope.fr asked Professor John FitzGerald, economist at the Economic and Social Research Institute in Dublin, how Ireland has managed to map out a path to economic recovery and what measures the EU should take to assist other eurozone countries.Â

What is the current situation in Ireland and what is the outlook for 2010-11?

We expect output to fall again by a small amount this year. The recovery in Ireland won’t begin until next year and it will be 2012 or 2013 before we see a return to strong growth in the economy.

Compared to quite a number of other countries in Europe, Ireland took extremely tough fiscal measures last year and this year which means that the government is taking money out of the economy. This means that even though Europe is likely to show some growth this year, Ireland will show a fall in output as a result of the tough budgetary measures.

John Fitz Gerald is responsible for research on Macroeconomics, Energy and Environment at the ESRI. He was a member of the EU “Group for Economic Analysis” from 2002-2004 advising the President of the EU Commission on matters of Economic Policy. From 2004 to 2008 he was president of the EUROFRAME group of European economic research institutes.

Do you think the measures that the Irish Government have taken will be effective?

Yes, we think that the measures will be effective in tackling the crisis. The underlying structural deficit in the economy before the Government began taking action in 2009 was around 8%, we now think that it is probably in the 3-4% range. The Irish Government still needs to do more. A tough budget next year will probably complete the bulk of the adjustment so that when the economy recovers fully the country will no longer be in deficit; this is the objective that we are setting ourselves.

Why was Ireland so badly affected by the economic crisis?

The Irish Government did not wake up to the fact that when Ireland joined Monetary Union they needed to run the economy in a different way. Instead, they allowed a bubble to grow in the property market. The ERSI issued repeated warnings from 2001 and especially from 2003 onwards but the Irish Government didn’t deal with it. When the property bubble burst it caused huge dislocation to the economy. It is very similar to the situation in Spain.

However, Ireland is different from the UK, it is not just about a burst in housing prices. It is the implosion of the construction sector which has been particularly damaging. The housing sector absorbed 14% of the economy at its peak. The norm in EU15 countries would be 5-5.5% of the economic activity. It squeezed out firms that were exporting. Now this boom has ended, it will take quite a while before the exporting firms recover.

Is Ireland in a similar situation to Spain, Greece and Portugal?

The point, which many people have ignored about Monetary Union until recently, is the balance of payments. By 2003, Ireland moved into a balance of payments deficit. This was a sign that we should have tightened our fiscal policy.

Our forecast for this year is that the balance of payments deficit will be reversed and that there will be a small surplus in 2010, whereas in Portugal and Greece they are facing continued large balance of payments deficits.

This means that the people of Ireland will be repaying their debts and not looking for money on world markets. The Government will be borrowing a lot of money abroad, but the household sector and companies sectors are saving, putting the money into banks which in turn are busy repaying this money abroad. In terms of the total national liababilities, they will fall this year.

In the case of Greece or Portugal, the people of these countries have to borrow more money on the world markets, thus increasing their total external liabilities in order to fund existing economic activity. Ireland is in a very different situation.

The balance of payments deficit is something which Olivier Blanchard, chief economist at the IMF, has highlighted. The lack of awareness of this issue is one of the reasons why people didn’t see the problem coming. There was a failure to realise that the balance of payments still matters for regional economies in EMU. The obverse of this is that if you are in a balance of payments surplus, you are in a much better situation, and this is the case of Ireland.

Why are smaller peripheral countries being so badly affected by this crisis?

Sweden, Finland, Netherlands and Belgium haven’t been hit in the same way. Some countries ran things badly, others didn’t. Of the EU 15 countries, there was a need in Ireland and Spain to invest in housing in a way that wasn’t necessary in Germany or France for demographic reasons. However, the boom made possible by Monetary Union, was mismanaged and governments let it get out of hand. Ireland and Spain are very similar in this regard.

Sweden and Finland ran their economies better because they had experienced this bust situation in 1990-91. They knew they had to control housing booms. They knew that they had to manage their financial sectors. They learnt the lesson then and didn’t forget this experience when they joined the euro. Ireland and Spain have learnt the lesson the hard way. Greece and Portugal are rather different in terms of their problems.

The Economic and Social Research Institute (ESRI) produces research that contributes to understanding economic and social change and that informs public policymaking and civil society in Ireland and throughout the European Union.

What is the significance of the commitment to help Greece made at the European Council last week?

I think what is important for Germany, and hence for the all the Euro area, is that support is only provided if the pain is borne by the country involved. Europe can provide an umbrella under which the Greek economy or the Portuguese economy can make an adjustment but this adjustment must be made by these economies. The price of European help is that countries must dig themselves out of the hole they have gotten themselves into.

Countries must retain their national autonomy. Ireland was very conscious of this last year. We knew that no one else could help us. Greece has to realise, politically and domestically, that they have to solve their own problems. It is important that it is not aid from Germany or France but that it is the EU providing the respite to allow them to recover. Otherwise, interest rates would rise in Germany if Germany was seen to be bailing out all the eurozone economies. Higher interest rates in Germany would negatively affect Ireland and all other European economies.

This is about Greeks making the adjustment themselves just as Ireland did.

What can be done to create greater economic coordination or an ‘economic government’ as it is referred to in France and was mentioned at the European Council?

What some in France mean by economic government would be most undesirable It would mean applying French standards everywhere. If you insisted you had French welfare standards in Portugal, no one would work. If France is prepared to pay for everyone in Portugal to live on social welfare, then that’s alright but that is not sustainable.

The larger the economy the more difficult it is to manage peripheral regions if you apply common rules. The example of the Mezzogiorno is significant - there has been no adjustment in 30 years. Once the central Government provides Italian standards of living in the Mezzogiorno without them having to produce the output, there is no incentive to reform.

I think that greater coordination at EU level would be valuable but to apply the same rules and standards throughout the EU would not work.

Jean-Claude Trichet, President of the ECB, has said that it would be “humiliating” to have an intervention by the IMF in the eurozone, should the EU set up a European Monetary Fund?

It would make sense for us to clean up our own act. From the point of the view of the economy that would be supported by the European Monetary Fund the result would be the same. If a country is driven in to the IMF’s hands, the IMF tells it to make the cuts, it is up to the country in question to decide where to make them, but it is very painful. The experience would be exactly the same for Greece whether it was the EMF or the IMF.

From the broader European point of view, it would be better for the EU to take responsibility for own problems. In the absence of such a fund, the IMF is the ultimate guard.

Futher information :

Irish Economy Today - ESRI

The Irish Economy blog

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