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The public policy blog of the American Enterprise Institute
Buoyed by her overwhelming electoral victory, German Chancellor Angela Merkel has lost no time in asserting that she sees no reason for a change in German policy towards the European debt crisis. In that context, she has again touted the merits of fiscal austerity and structural economic reform as a cure-all for the ills of the European economic periphery. And she has again held up Ireland as the poster child for that approach.
While Ireland has certainly been among Europe’s better students in terms of policy implementation, the economic results achieved to date from those efforts seem to have been rather paltry. Indeed, although Ireland’s export sector has been strengthened by improved competitiveness, its overall economy experienced a double dip recession in the latter part of 2012 and early 2013, before it managed to barely grow by 0.4% in the second quarter of the year. This still left Ireland’s GDP 1¼% below the level of the same period a year earlier. It also left Ireland’s unemployment rate at around 13½% of the labor force.
Holding up Ireland as Europe’s poster child sits oddly with the IMF’s most recent assessment of the Irish economy. In the IMF’s view, Ireland faces an uncertain medium-term economic outlook, which still clouds the country’s economic prospects. The IMF believes that Ireland’s economic recovery very much hinges on growth strengthening significantly in Ireland‘s main trading partners and on continued favorable conditions in international financial markets. This is because domestically, demand recovery faces drag from still high private sector debts, continuing fiscal consolidation, and risks to the domestic credit flow necessary to sustain the recovery in the medium term.
Further undermining Ireland’s status as a supposed poster child for the European periphery is the fact that its public finances are arguably in worse shape than those of countries like Portugal, Spain, and Italy. Ireland still has a public debt to GDP ratio of the order of 125% and its budget deficit remains as high as 7½% of GDP. It is difficult to see how Ireland will restore public debt sustainability given its anemic growth economic outlook and the fact that the country is now on the cusp of recession with still further major fiscal adjustment to do.
In short, holding out Ireland as a poster child for Europe would seem to be premature if one were to go by the country’s economic results to date and by the huge challenges to economic growth and public debt sustainability that the country still faces.
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