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Ambrose Evans-Pritchard: Europe's debt crisis credibility hangs on thin Irish thread


Michael Noonan: surprise move on premiums

Michael Noonan: surprise move on premiums

Michael Noonan: surprise move on premiums

Ireland has begun to say no. Its latest austerity budget -- the seventh in six years -- is a small act of defiance against the scorched earth policies of the EU-IMF Troika.

Labour leader Eamon Glimore has long been grumbling that EU ideologues treat his country like "some type of economic experiment for austerity hawks". He has prevailed.

Dublin will drain a further 1.5pc of GDP from the economy in fiscal cuts and taxes over the next year, not 1.8pc as demanded.

 Finance minister Michael Noonan told the Dail this week that the nation can take no more. "Too long a sacrifice can make a stone of the heart," he said, quoting WB Yeats from Easter 1916.

He picked a double-edged poem, deliberately no doubt.

Yeats shuddered at the Easter Uprising of 1916, not least because Irish regiments were fighting in Flanders. Yet the myopic brutality of General Sir John Maxell destroyed the bonds of union.

"All changed, changed utterly: A terrible beauty is born," runs the stanza.

The EMU commissars must bite their lips. They have been praising Ireland for so long as the poster child of "internal devaluation" that they cannot now risk a showdown. The credibility of EMU debt policy is at stake. Ireland must become the first rescued state to exit the Troika regime and return to the markets this year.

It is of course a fallacy to claim that Ireland's ability to survive the poisonous 1930s prescriptions imposed by Brussels proves that austerity "works", and a second fallacy to claim that Spain, Italy, Portugal, and Greece can therefore pull off the same feat.

To the extent that Ireland is recovering, this is because its people are formidably enterprising and have an ultra-open economy with a high enough trade gearing to withstand the combined shock of a fiscal squeeze equal to 19pc of GDP and a double-digit collapse of the money supply.

The Celtic Tiger has never been seriously uncompetitive within the euro, and it needs no lessons on free markets from Brussels. It places 15 on the World Bank's ease of doing business index, the best EMU state after Finland, compared to: Portugal (30), Spain (44), Italy (73), and Greece (78).

Note that Ireland has slipped from 7th place since it submitted to EU suzerainty three years ago. As the trade unions have said all along, Troika medicine is brutish austerity and nothing else. Not only is reform a sham, but the lost skills and hysteresis effects of mass unemployment have cut Ireland's future growth rate for 20 years to come. The brightest are leaving. Net emigration is 33,000 a year, a quarter to the UK, 17pc to Australia.

What Ireland had was a calamitious property bubble caused by interest rates set in Frankfurt that were far low for a tiger economy, and which became ever lower in real terms as the blow-off spiral reached a crescendo -- eloquently analysed by central bank governor Patrick Honohan in "What Went Wrong in Ireland".

Ireland made awful mistakes, yet is more sinned against than sinner. The European Central Bank forced the country to take over the €60bn liabilities of five Irish banks during the white heat of the crisis in 2008, in order to protect Europe from a chain reaction. "German banks would have suffered massive damages if Ireland had done an Iceland and walked away. The decision was a disaster for Ireland and the whole burden fell on the Irish people. There is a moral issue here," said Megan Greene from Maverick Intelligence.

EU leaders recognized a special duty of care to Ireland at the June summit in 2012, promising to mobilise the ESM bail-out fund to clean up the banks. The text is crystal clear. Yet the creditor core has since resiled from this promise. Germany's Wolfgang Schauble repeated this week that Ireland can expect no help on legacy assets. "Ireland did what Ireland had to do and now everything is fine," he said.

Whether everything is fine is a matter of dispute. Ireland's budget deficit is still 7.3pc of GDP. Public debt is 123pc, near the point of no return. "The debt is massive. There is almost no domestic growth. In the end they are going to need debt restructuring," said Ms Greene.

US investor Franklin Templeton made a fortune buying up a tenth of Ireland's debt stock in the dark days, and so have others. Ireland's 10-year yields are down to 3.67pc. Kudos to them, but Moody's still rates Irish debt as "junk", citing the risk of economic stagnation for the debt trajectory.

Household debt is still 200pc of GDP (IMF), while the assets that underpin it are greatly shrunken after a 57pc fall in house prices. Mortgages in arrears by 180 days are at a record 17pc.

Whether or not Ireland can pull through depends on trade, and in this respect the country tells us nothing about prospects for Club Med. Irish exports of goods and services are 108pc of GDP, compared to: Portugal (39pc), Spain (32pc), Italy (30pc), and Greece (27p).

In other words, it is three times easier for Ireland to claw its way back to viability through trade, and even so it has not been easy. The 'patent cliff' -- as Viagra and Lipitor go generic -- has cut exports by 17pc over the last year. Yet the country at least has a current account surplus of 2.3pc of GDP. Its great gamble two decades ago has paid off. The niche industries of IT, pharma, and financial services have all reached critical mass.

No doubt large pockets of Spain can replicate this feat. The Basque country comes to mind. But Spain has a much bigger hill to climb. It has turned a deficit of 10pc of GDP five years ago into a 1.3pc surplus this year, but chiefly by crushing internal demand. The export surge has tapered off.

The IMF says gains in Spanish unit labour costs (ULC) are a productivity illusion caused by mass unemployment. The harsh reality is that Spain's net international investment position is still minus 90pc of GDP and even in depression with a jobless rate of 26pc the country still imports too much to cover this imbalance.

Nothing is written in stone. Whether Ireland or any other EMU victim state can claw its way back to viability depends on the actions of the ECB. If Frankfurt reflates aggressively, Ireland can undoubtedly make it, and perhaps Spain as well in an ideal world. If it continues to let debt-deflation run its course, even the poster child is doomed.


Telegraph Media Group Limited [2023]

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