Wednesday, December 18, 2013

Ireland's non-recovery?

Ireland, which received a $92.9 bn bailout in return for a very strong dose of austerity, apparently has become the first crisis-hit European country to regain market access. Its fiscal deficit has shrunk from 30% of GDP in 2010 to 7.5% for 2013. But the cost, as this NYT article highlights, may have been prohibitive, 
The government cut 30 billion euros in spending, or nearly 20% of gross domestic product, one of the largest austerity programs anywhere. New taxes were introduced. Salaries for public employees were cut by around 20%, and reductions in unemployment and welfare benefits followed. The bill to bail out Ireland’s banks has amounted to nearly €10,000 per Irish citizen... As the austerity measures have played out, the number of people in need has jumped. Homelessness is up nearly 20% since 2010. A study by Growing Up in Ireland tracking 11,000 families with young children found 67% could not afford basic necessities, and were behind on utility bills, rent and the mortgage.

Consumer spending has been flat. Through the end of the third quarter this year, 18.5% of homeowners had missed a mortgage payment and 12.5% were three months or more behind on their repayments, according to the central bank. Half of all loans to small- and medium-size business are also in arrears. More than 200,000 of Ireland’s population of 4.6 million have emigrated since 2008. Youth unemployment is 28%. Over 60% of job seekers have been out of work for a year or more. And 20% of children now live in households where neither parent works, the highest rate in the European Union.
Ireland's 10 year sovereign bond yields may have plummeted from 14.5% to 3.5%. But in the absence of any economic growth and the sharp cut in public spending, I am not sure how the country can recover fully without prolonged period of slow growth. Even as the economy has been contracting, public debt to GDP has ballooned to over 120%. It will rise further, unless growth picks up smartly in the near-term.
Historical Data Chart
At the same time, unemployment rate has risen to 13% and labor force participation rate has fallen from 64% in 2009 to 60%.
Historical Data Chart
One area where the savage austerity has been successful is in the country regaining its labor competitiveness vis-a-vis Germany. But ironically, the depressed wages are most likely to keep the aggregate demand muted for some time to come, thereby discouraging private investments and in turn further constraining growth.
Historical Data Chart
Update 1 (1/10/2014)

Fintan O'Toole writes about the illusion of recovery from austerity policies, "an unreal image of slimmed-down perfection".

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