Email of the day (3)
Comment of the Day

November 03 2010

Commentary by Eoin Treacy

Email of the day (3)

on Ireland:
"It would be nice if you were to comment one day in FM about the impact on daily life of the current austerity measures in Eire and whether we can count on the Celtic Tiger to return to health."

Eoin Treacy's view Thanks for an interesting but big question. Sentiment is about as bearish as I've seen heading into the upcoming budget which will set out €15 billion in additional savings spread over the next four years. On a per capita basis, this is more severe than the UK's recent hair shirt budget. The domestic economy is shell shocked with a 13% unemployment rate, house prices that have yet to bottom and wage contraction. The banking sector is now largely state owned and is likely to take years to recover

I believe that to describe the situation that prevailed prior to the Financial Crisis as "The Celtic Tiger" is a bit of a misrepresentation of the actual environment. The Celtic Tiger more accurately describes the period from the early 1990s through to the early 2000s when the country offered an attractive destination to multinationals due to low corporate taxes, an educated cheap workforce and improving productivity. This environment decayed as deliberately inflationary policies were pursued. Wage pressures increased, public spending ballooned, infrastructure investment multiplied and the export sector diminished relative to the domestic economy led by construction.

The domestic economy is now in severe recession. The strength of the Euro and weakness of the Pound are hurdles for many businesses. Soaring borrowing costs are an increasing headwind. While the country has no need to borrow additional funds until early next year, the recent surge in the country's risk premium is a cause for concern. Despite a fresh round of pessimism on the bond markets, there is time for the budget to be delivered and its aims assessed before the country needs to return to he market for funding. It will have to severe enough to allay creditor anxieties though.

Anecdotal reports indicate that the majority of emigration to date has been from East Europeans going home. During the 1980s emigration was considered a release valve and while Irish emigration has so far been a trickle the likelihood is that it will increase in the coming years.

If the Celtic Tiger economy is ever to be reborn, then competitiveness should be the key ambition for policy makers. The measures taken to date have corrected the situation somewhat but the road to economic recovery remains a long one. The export sector, now led by food, pharmaceuticals, information technology and airlines is proving resilient.

The ISEQ Index has probably bottomed but has the characteristics of a market that is likely to remain in base formation development for a considerable period. Over time, the export sector is likely to constitute a greater proportion of the Index's market cap which could improve its medium-term prospects.

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