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It is believed by some observers that the banking system needs to be scaled back, as it had become too large over the past decade (Brennan & Doyle, 2010). The country has also cut back its government spending in an effort to assuage markets, but the markets viewed the austerity measures are harming the country's chance to rebuild its economy, so the austerity measures failed.
Ultimately, the overheated asset prices that are hurting Ireland's economy cannot be dealt with effectively with the common currency. The euro does not have effective mechanisms for dealing with such crises, and Ireland does not have sufficient influence over the euro to enforce any mechanisms that there are. Euro policy is typically dictated by Germany and France rather than the small economies within the Eurozone. Exhibit a shows the U.S./Euro exchange rate history for the past five years.
Ireland is an export-driven economy that maintains a merchandise import/export surplus even given the recent troubles. The country has, however, suffered from a steep decline in domestic demand, and this has served to depress the economy. Exhibit B. shows some of the major economic indicators for Ireland. Indicators such as interest rates are subject to control by the European Central Bank, so are not Ireland-specific. These indicators show that Ireland saw a huge run-up in its economy through the middle part of the last decade, only to see an equally spectacular collapse in the past two or three years. The CPI floated in a manageable zone until 2006, when it spiked for three years, the result of an asset bubble. The deflation Ireland is experiencing now is simply a reversible of that bubble. If the country still had its own currency, this deflation would likely be happening more quickly. The remainder of the figures also indicate a country with robust economic performance that has since suffered badly in the face of global economic slowdown.
Despite the negativity, the Irish maintain a high standard of living. Irish people live a Western lifestyle in every respect. There are 5.048 million cellular phones in the country, more than one for every person. There are 2.83 million Internet users and television usage in ubiquitous. While domestic demand is suppressed and this has hurt the real estate market, that market was overbuilt. There are more homes than there are buyers, simply put, because builders built for a rising population that in the past couple of years has simply not materialized. Irish people in general live a comfortable lifestyle with which an American would be familiar.
The Irish economy is mired in a deep slump and it will be difficult for the country to get out of this. There are positive signs in the Irish economy in general, but asset prices are too high and the country has little recourse to bring those costs back to equilibrium. The most useful policy lever in this situation would be currency devaluation, but Ireland does not have this lever available to it as the result of its participation in the euro. This will have profound implications on the Irish economy, including falling wages and deflation, both of which have continued this year (Doyle, 2009).
The best response the Irish government can muster to the crisis is to cut government spending, but that has not made much difference to the nation's cost of borrowing. The cost of bailing out the banking sector has necessitated a bailout from European partners and the IMF (Beattie, 2010). As a result, the current narrative surrounding the Irish economy is not positive. With high unemployment and depressed domestic demand, the Irish economy needs to redouble its efforts in export markets in order for the country to renew its economic growth. However, this is a difficult task given the overheated asset prices. Being part of the euro means that Ireland is now expensive relative to most of the continent. While it does still have some competitive advantages in low corporate taxes and an educated, English-speaking population, the high cost of doing business in Ireland today hints at growth problems for the coming years.
Another problem is that high unemployment has caused many Irish to seek work overseas. This has resulted in a brain drain, as the country has seen its highest level of outward migration, with around 5000 Irish leaving the country every month. This threatens to remove one of the country's strongest competitive advantages if Ireland loses its highly-educated workforce, leaving behind only those with limited skills (Hayes, 2010). Without the ability to draw high tech companies to Ireland because of high asset prices and declining numbers of educated workers, Ireland's economic recovery could take a long time. There is little reason for optimism, given that the country is currently bottoming out and many of the structural problems that plague Ireland remain.
Overall, Ireland has turned from one of Europe's top success stories to a nation in economic crisis. The headlines are negative, but they are backed by economic indicators that point to high unemployment, plummeting domestic demand, deflation and a host of structural issues that will make any further recovery difficult for the Republic. There is little indication that Ireland has a credible plan for restoring investor confidence, and the government does not have any serious policy levers that would allow it to devalue its currency in order to bring asset prices back to equilibrium. While the country still has low corporate taxes and has some antecedents of growth, there is little evidence that growth in the Irish economy will recover any time soon.
The outlook for the next few years looks challenging for Ireland. The country will need to experience continued deflation, which will reduce asset prices but will also stifle investment. Deflation will increase the costs associated with the country's sovereign debt, which will pose a challenge to a government already faced with escalating interest rates and no room left to cut spending. The economy will also need to continue to contract, which will only make the unemployment situation worse. The corporate tax rates are already low, so there is little the government can do to spur new investment, but it will need to take whatever steps it can to increase FDI. The government also needs to create more jobs in the economy in order to reduce the long-term negative impacts of the brain drain. Unfortunately, the government is instead focused on "austerity," so there will be little new employment created by that means. All told, the situation for Ireland right now is at its nadir, and the only thing left to be determined is how long the trouble will last and what the shape of the recovery will be.
Exhibit a: USD/Euro 5-year chart courtesy: Yahoo! Finance
Exhibit B: Ireland Economic Indicators
CPI % ?
GDP % ?
Domestic Demand % ?
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Slattery, L. (2010). Foreign direct investment into Ireland rallied in 2009. Irish Times. Retrieved November…[continue]
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