Ireland takes path of savage cutbacks in hopes of quicker rebound; some economists skeptical

Irish test limits of austerity

DUBLIN — For two long years, the Irish have suffered through harsh government cutbacks and tax increases that have taken a fat chunk out of their take-home pay — painful medicine to avoid national bankruptcy.

After all that, they’re ready to cut some more.

Workers in other European countries with financial troubles are striking or rioting at the mere announcement that cutbacks are needed to dig out of the government debt crisis engulfing the continent. But the Irish are not protesting.

Instead, they are doubling down with more austerity.

Some economists say the decision to keep cutting back is a mistake because it will remove the stimulus of government spending from the economy, deepening and dragging out the economic slowdown. That in turn would reduce tax revenue, defeating the purpose by making Ireland’s debts harder to pay.

But many people here think if they can get debt under control, their business-friendly economy could rebound ahead of Greece and Spain, financially troubled eurozone members that have higher business costs and more red tape. Irish optimists cite exceptionally strong links to the giant U.S. economy, Ireland’s flair for exporting, its rock-bottom corporate tax and smoother labor relations.

There’s a long way to go. Irish unemployment has tripled in two years to a 16-year high of 13.4 percent. The government’s 2009 budget deficit of 14.3 percent of gross domestic product was highest in the 16-nation euro zone — higher even than Greece, which needed an international bailout to avoid bankruptcy.

Ireland’s debt-to-GDP ratio has skyrocketed from 25 percent at the end of 2007 to 65 percent at the end of 2009 — less than in many other countries but an alarmingly quick increase that is forecast to continue.

More than that, Irish workers have seen incomes sink amid rapidly imposed tax hikes and benefit cuts. All workers above minimum wage have suffered a new levy on paychecks equivalent to 4 percent to 8 percent of their gross pay. Ireland’s 350,000 public servants, who have the country’s most stable jobs and guaranteed pensions, have been hit much harder through pay cuts ranging from 5 percent to 15 percent and a pension levy equivalent to about 7.5 percent of salary.

Now Prime Minister Brian Cowen promises three more hard-cutting budgets through 2013 that are expected to include new taxes on property and water. Despite this, three surveys show Irish consumer confidence is rising.

Dublin barber Ken Donnelly measures the depth of his fellow citizens’ financial fears by the length of their hair. It got scraggly last year but is getting trimmer again.

“When the recession hit, regular customers who used to come in every week, or every month, started going longer and longer between cuts,” said Donnelly, who has kept charging €10 per cut through good times and bad. “But we’re getting good, solid business again now.”

Experts agree that Ireland, by moving early, projected a confidence internationally that may have shaved €1 billion off its annual interest bill. Early last year, bond traders rated Irish debt the riskiest in Europe, but today’s 10-year Irish bonds pay interest of around 5.5 percent, midway between the German benchmark and the Greeks’ junk-grade bonds.

“The Irish have cut back tightly and got away with it without a lot of social and political upheaval. They have walked the tightrope very successfully and are widely admired for it,” said Gregory Connor, finance professor at the National University of Ireland at Maynooth.

The numbers show a return to modest growth — an annual rate of 2.7 percent in the first quarter of 2010 — following last year’s record-setting 7.6 percent fall in GDP. One dramatic sign of improved consumer sentiment is that car sales in 2010 are already ahead of all those sold last year.

Ireland’s deep recession brought falling prices, with many stores discounting heavily to attract customers. Consumer prices fell at a peak rate of 6.6 percent in mid-2009 as stores discounted heavily to woo business. In a sign of how expensive it had become during the boom times, the EU statistics agency Eurostat says Ireland remains the second-most-costly nation in Europe for goods and services.

Economists and business leaders say Ireland is not Greece in several important ways.

Like eurozone lynchpin Germany, Ireland lives or dies on its ability to export. And its chief trade partners are Britain and the United States, both outside the faltering euro zone.

That has made the euro’s recent slide versus the dollar and other currencies critically good news, because software, microchips and drugs made in Irish facilities are now cheaper to sell worldwide for the 1,000 foreign companies located in this land of 4.5 million.

Ireland is also closer to the United States in business culture, because of the tens of thousands of returned Irish-American emigres. They help run the 600 U.S. businesses that flocked to Ireland over the past two decades because of its exceptionally low 12.5 percent rate of corporate tax.

The American Chamber of Commerce in Ireland represents businesses that employ 100,000 people here — 5 percent of the work force — and generate nearly 20 percent of GDP. IBM, Hertz, eBay, PayPal and EA Games have expanded Irish operations recently.

Jim O’Hara, general manager of Intel Corp. in Ireland where the microchip giant employs 3,600 west of Dublin, says Ireland’s economic crisis has barely impacted the company’s business decisions. Intel Ireland has laid off 600 over the past year because an old-technology wafer line closed, but it will be competing next year with Intel’s U.S. and Israeli factories as the location for the company’s next generation of microchip.

If anything, O’Hara said, the austerity shock has made Ireland more attractive. Wage and state-regulated energy costs are down, layoffs have meant a stronger pool of recruits, and slumping property prices make Ireland less expensive for new arrivals. “That’s all helped to make Ireland a more competitive location,” he said.

And Irish unions are not Greek unions, which have held six national strikes in recent months.

Ireland’s 2 million workers — a third of them unionized, mostly state employees — have mounted few protests. Since 1987, Ireland has negotiated national wage-pact agreements designed to promote gradual raises and minimize strikes. As new income taxes slash salaries, union leaders have preferred to keep talking with the government and the major employers group, the Irish Business and Employers Confederation, in hopes of softening the blows rather than preventing them.

Still, some economists think Ireland’s course is wrong.

They argue that slashing government spending in a downturn will just make the slowdown worse and increase unemployment. One skeptic is American Nobel laureate Paul Krugman, who recently warned that Ireland’s agony has not, in fact, reassured markets despite widespread belief that it has.

“The reality is that nothing of the sort has taken place,” Krugman wrote. “Virtuous, suffering Ireland is gaining nothing.”

Trinity College Dublin finance lecturer Constantin Gurdgiev said that point of view ignores a key difference between Ireland and the United States.

“Tiny Ireland is one of the most open economies in the world, but it has no power to dictate to bond markets or print money. We simply do not wield anything like the kind of power to run up deficits and debts that America has,” he said. “America can spend its way out of problems. We cannot… So we must cut, and we must reassure our lenders.”

Despite the acquiescence of the public, the price has been high.

More than 3,000 businesses have gone bankrupt across Ireland since 2008, and 240 construction firms folded in the first five months of 2010 alone. While export-driven GDP is growing, the locally based economy remains flat.

Few professions have been harder hit than architects, who flocked to Dublin during the long property boom. But even here, innovators are finding survival tactics.

For architect Anthony Brabazon, who two years ago oversaw a four-architect practice at a prestigious Dublin address, business ran dry in 2009 as clients began failing to pay. Brabazon laid off two architects, negotiated an early end to his office lease, cut fees by 30 percent and moved his firm into his home.

Then Brabazon developed a business plan for the recession: a flat-fee surveying and advice service called Help My House. He recruited 18 other job-hunting architects across Ireland to do €150 troubleshooting visits to clients. The business, designed to overcome people’s fear of hiring an architect, is growing.

“In a recession, there’s still tons of money out there. People are just afraid and are sitting on it,” he said with a wall map of Ireland, marked with his network of architects, in the background.

“There’s something like €80 billion sitting in Irish banks right now. Whenever people get their confidence back, God willing, this country will be in good shape again.”

Online:

American Chamber of Commerce in Ireland, www.amcham.ie/news/default.aspx

Architect Brabazon’s business, www.helpmyhouse.ie/index.html

Finance Dublin’s running ‘debt clock’, www.financedublin.com/debtclock.php

Friends First economic forecast, tinyurl.com/23cdxvf

Gurdgiev economics blog, trueeconomics.blogspot.com/

Irish GDP and GNP figures, tinyurl.com/3e5w9a

Irish economists’ group blog, www.irisheconomy.ie/

Irish business bankruptcies, www.insolvencyjournal.ie/index.aspx