Ireland and Greece prove the naysayers wrong
Irish Premier Enda Kenny has announced his country will exit its bailout programme in December.
When he took office in 2011, Ireland’s budget deficit was over 30 percent of GDP. Narrowing it to projections of 7.3 percent this year and 4.8 percent next, Kenny has restored market confidence in Dublin’s ability to sort out its long-term debts.
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Investors are again willing to buy Irish bonds, raising funds and lowering borrowing costs.
In mid-2011, interest on Irish debt stood at 15 percent. Now it is below 4 percent and Ireland has raised sufficient cash balances to cover all its debt payments next year. Standard & Poor’s and Fitch have both returned their Irish rating to investment grade.
Without repairing its ability to manage its debts, Ireland’s government could not function for very long as a provider of essential public services. Irish recovery could not have happened without the fiscal consolidation which commentators attack as “austerity.”
This is why it is wrong to dismiss debts and deficits as the wrong problem, but let us examine what is often put forward as 'the real problem': unacceptably high unemployment.
Another bailout country is Greece.
There are those who blame its breakdown on "austerity," but to find the long-term cause one must go further back.
From 1981-89, Prime Minister Andreas Papandreou increased Greek spending by a mind-boggling 460 percent. Yet in the same period, Greece’s unemployment increased from 3 percent to over 7 percent of the workforce.
In the 1990s, the budget continued going up - by another 357 percent - but unemployment consistently kept rising too, reaching 12 percent by 1999.
Meanwhile, Greece’s public debt exploded from €2 billion in 1981 to €140 billion by 2000. Before the financial crisis hit, the spending bonanza had soared to €261 billion, meaning ever larger interest payments eating into the budget and jeopardising services.
Back to Ireland. There is now an array of Irish job statistics which look like even more of those "rewards" they were told would “never” come.
Unemployment benefit claimants have fallen for the last sixteen months consecutively. Job creation is at its highest for five years, with 34,000 new jobs in the last year while construction jobs grew by almost 6,500 in the second quarter of 2013.
Tech giants such as Facebook and Yahoo are looking to join the likes of Google and TripAdvisor in Dublin’s “Silicon Docks” area.
Meanwhile, the Irish economy is out of recession, with its predicted growth of 1.1 percent for this year expected to double to 2.2 percent next year. Consumer confidence is the highest for six years. Property prices are showing a sustained recovery and construction has risen by 11.7 percent in a year, the highest increase since 2006.
Ireland has done this whilst keeping its overall tax take down at 34.6 percent of GDP, and attracting investors with a 12.5 percent corporate rate.
Greece, in contrast, takes 44.7 percent of GDP in tax and has recently pushed corporate rates back up to 26 percent.
The Greek budget remains bigger than it was just eight years ago, at the height of the spending spree.
Taxation is Athens’ inadequate tool for cutting the deficit, which this year will pile on another €8.4 billion onto the debt. In turn, the debt will hit €323.1 billion – a new high of 176 percent of GDP. Greek unemployment increased to almost 27 percent.
According to some, the level of debt does not matter. Well, it does.
On 31 January, the economist Paul Krugman crowed that Ireland epitomized a “rather pathetic search for austerity success stories.”
Dublin’s recipe, Krugman pronounced, “promised rewards that haven’t arrived and never will."
Ireland is reaping the rewards Paul Krugman predicted would never come.
The Irish love their horse racing. I doubt they would take many tips from those who say "austerity" / "fiscal consolidation" does not work. Nor should Europe.
The writer is a Belgian MEP and vice president of the European Conservatives and Reformists group in the EU parliament