Taking the pain early has shown Ireland to be quicker and more courageous than most in adapting to economic adversity, writes Economics Editor Brendan Keenan
Published 18/08/2011 | 05:00
AT last, someone has noticed, even if they are foreigners. Or perhaps it is because they are foreigners.
One does not have to share all the optimism about the future of the Irish economy contained in the 'Financial Times' article by David Vines and Max Watson. Many Irish economists would quibble with the modest ceiling they put on Irish debt or their view that the corner has been fully turned in the banking crisis.
But Professor Vines and Mr Watson -- the latter helped draw up reports on the Irish banks and sits on the new Central Bank commission -- are right to say that Ireland is different from the other two rescued economies, Greece and Portugal: different, indeed, from the rest of the eurozone.
The difference is the speed with which Ireland is reducing its costs. New figures from the European statistics service yesterday show once again that Ireland has not only the lowest inflation in the 17-nation eurozone but that it is in a category all of its own.
This has been the pattern since the crash. It is calculated that the difference in inflation means that half the extra increase in Irish prices since the euro was launched in 1999 has now been eliminated.
This is exactly what markets fear Greece and Portugal -- and perhaps Spain and Italy -- cannot do. They are held back, not just by the need for austerity to reduce debt, but by not being able to compete with Germany and its satellite economies.
Ireland's remarkable deflation may well eventually restore investor confidence, but it is a short-term headache for the Government. Debt is measured against the money ('nominal') value of the economy and low inflation holds that back, making it harder to achieve deficit targets.
As the table shows, although the Irish economy grew only slightly less than that of Britain, rampant inflation gave the UK nominal growth of almost 5pc, while Ireland's was just 1pc.
The second headache for the Government is that to concentrate on competitiveness means minimising extra costs for business or consumers.
Better to cut their incomes instead, whether through lower pay or higher taxes.
Good economics maybe, but lousy politics.