Lessons from Ireland

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February 7th, 2014

In December 2013, Ireland exited the Troika bail-out programme with success. One sign of this is the welcome given to its public debt auctions in January and the favourable growth prospects presented by this Celtic country: for 2014 and 2015 the consensus of analysts expects growth in GDP of 1.9% and 2.4% respectively, noticeably higher figures than those predicted for countries in the core of the euro area and for the periphery countries as a whole.

We should remember that Ireland's bail-out was necessary because of the losses incurred by the financial sector and ultimately the public sector due to the real estate crisis. Unlike other periphery countries, Ireland's economy did not have any major competitiveness problems. The Troika's requirements therefore focused on clearing up the financial sector and ensuring the country's national accounts were sustainable. Its financial sector has been extensively restructured: the hardest hit assets were concentrated in a bad bank and the rest of the banks, which were recapitalised, now have capital ratios that are clearly above the minimum requirements demanded by Basel III.

The public sector also had to take drastic measures to ensure the sustainability of its accounts. Although the starting point for Irish debt was very good (standing at 25% of GDP in 2007), assuming the financial sector's losses has pushed it up by 79 p.p. This, together with the impact caused by the recession, has placed it above 100% of GDP (in 2013 it is expected to end up at 123.9%). However, although the public deficit is still at a high level, the fast and effective implementation of fiscal consolidation measures has helped to dispel fears regarding the sustainability of the national accounts. Ireland's government has reduced its deficit by 4 p.p. since the peak reached in 2009, more than the achievements of Spain or Portugal.(1)

Ireland has also been able to rely on a competitive and highly internationalised economy. In 2007, before the recession started, the relative weight of exports for the economy as a whole was already very high, accounting for 80% of GDP. But over the last few years this figure has risen, reaching 106.7% in 2013 Q3. Such a sharp increase is partly due to the contraction in GDP, accumulating a 7.5% reduction between 2007 and 2013 Q3. Exports, however, have maintained an average growth rate of 2.4%, thanks largely to the significant gains achieved in competitiveness.

In short, the fast action taken by the Irish authorities and significant internal devaluation have helped the Celtic country to escape the firing line of international investors relatively quickly. However, the repercussions of the real estate sector's collapse on the financial sector and public accounts will take some time to disappear, so Ireland must maintain its iron will.

(1) This calculation takes the public deficit into account, excluding losses due to aid given to the banking sector.