Enda Kenny, the head of the Irish government (photo archive). (Efe)
The markets are sovereign and as much as they can punish, they can pay back in return. That is why Ireland can now reap the fruits after its sacrifices.
The bond yield is 6 percent below that of Spain, the credit default swaps dropped to the same level and the country has only received praise from the troika – the European Commission, the International Monetary Fund and the European Central Bank – since the country was rescued in 2010.
Ireland, which now surprisingly has achieved to be financed by the markets, has turned into an example that Spain should follow.
Here are six steps that Ireland has taken, which Spain should take note of:
1. Complete clean-up of the financial system
In 2007, the construction bubble in Ireland was not smaller than that in Spain. The difference between the two countries is that the first one wanted to put a stop to it at once by bringing the wrongdoings of its entities out in the light, creating a bad bank, nationalizing entities, conducting credible stress tests by the troika together with independent auditors and the authorities, while Spain chose to hide the problem.
The result is that Ireland began from zero a year and a half ago, while Spain is beginning to do its homework now. “Ireland took all its banks off the markets, cleaned up the real estate exposition, approved important capital expansion and took harsh decisions to recapitalize once and for all,” said Daniel Lacalle, a manager of Ecofin.
2. Intervention by the troika
Nevertheless, the rescue of the Irish banking sector was done at a much higher price. It received €85bn and the injection of state money into the sector equaled 40 percent of the country’s gross domestic product at the time. After the nationalization of the Anglo Iris Bank, the deficit jumped to 32 percent.
From that moment, Ireland has followed the path marked out by Brussels in detail, in a docile way despite the harsh measures asked from them. The result? The deficit dropped to 9.4 percent of GDP in 2011, below the estimates and below the limit set by the troika at 10.6 percent, as well as below the forecast by the the IMF.
3. Major cuts in public administration
It seems as if the word funcionario – Spain’s civil servants on life-time contracts in the municipal, regional and national public administrations – is synonymous to ‘untouchable.’ In Ireland, however, they did not hesitate to make changes in one of the most complicated sectors, that of the public administration. The country announced that it will reduce the number of employees in the public sector by 23,500 until 2015, which will mean a reduction by 10 percent of the workforce.
It is true, though, that Ireland has another margin, given that the unemployment rate is at 15 percent, compared to 24 percent in Spain.
4. Reduced pensions and higher retirement age
Disregarding the major economic theories, it is simply common sense that in order to reduce deficit, budget cuts must be done somewhere. One of the most controversial measures that the European countries have adopted affects retirement.
Ireland has done what no other government wanted to do: reduce pension payments by 10 percent and at the same time introduce a progressive increase of the retirement age up to 68 years in 2028.
5. Increased taxes
Ireland has also increased taxes, both direct and indirect taxes. For example, the state increased university fees by 25 percent, while in Spain this is now under consideration and will vary between different regions, from 15 to 25 percent.
Also, a tax of 100 euro has been introduced for houseowners, while in Spain the tax on real estate has been revised, and water supply is no longer free of charge. In fact, it is expected that from 2014 there will be meters installed in the houses.
6. Rejected corporate tax increases
Ireland has only refused one of the troika’s recommendations, which was to increase corporate taxes, which has had a positive outcome.
Although not much, the export increased in 2011 by 0.7 percent. Also, Ireland has moved up to the seventh country receiving direct foreign investments, with 186 new projects in 2011.
“One of the things that has allowed for Ireland’s growth is that it has opened up and its competitiveness, above all in fiscal matters,” said Alberto Matellán, manager at Inverseguros. “In Spain, opening up to foreign markets is under way, and in fact, the export is strongly increasing, so in this sense, Spain is doing well.”
But, it's important not to jump to conclusions too fast; all that glitters is not gold. Although Ireland is benefiting from the market investments in its debt, its GDP shows that the country is not doing as well as it may seem, with drops by 3 percent, while the public debt reached 130 percent this year.
“The market does not understand the Irish economy, which is a fiscal paradise with European judicial security,” said José Carlos Díez, chief economist at Intermoney. “If you take away the big multinationals established there, which are the ones that keep the GDP up, what’s left? I only know that they have not emitted debt for two years, while we are emitting debt for ten years.”
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