For Ireland, a Setback on the Road to Recovery

As Ireland prepares to become the first European country to exit its international bailout, politicians across the Continent have promoted it as a model for how austerity can help a country emerge stronger from the crisis.

“A shining example,” Chancellor Angela Merkel of Germany declared recently.

But Ireland’s economy is disappointing its fans — again.

The country slid into its second recession in three years during the first quarter, the government reported on Thursday. Consumers and businesses, still reeling from steep tax increases, government spending cuts and a long stretch of sluggish economic activity, have sharply curbed spending.

“Everything is not hunky-dory in the Irish economy,” said Constantin Gurdgiev, a professor at Trinity College in Dublin. “But there is a group of people who refuse to listen to that, because they see it as convenient to promote Ireland as a success story to support policies promoted by the troika,” he said, referring to the country’s bailout creditors, the International Monetary Fund, the European Central Bank and the European Commission.

Gross domestic product shrank 0.6 percent in the first quarter from a year earlier and was revised to show contraction of 0.2 percent in the fourth quarter of 2012, the government said. Its economy had already shrunk 1 percent in the preceding quarter.

Consumer spending slumped 3 percent in the first quarter from a year earlier, the steepest decline in four years. And exports of goods and services declined 3.2 percent, the deepest contraction since Ireland fell into its crisis in 2009, the government reported.

The backsliding reverses the momentum Ireland seemed to have gained since it joined Greece in 2010 as an emergency bailout recipient. In exchange for its 67.5 billion euro ($88 billion) bailout, Dublin agreed to an austerity program aimed at rapidly improving the country’s tattered balance sheets.

But gross investment in the economy has continued to shrink, with construction activity and the retailing sector.

“Everything domestic is still contracting,” Mr. Gurdgiev noted.

On the other hand, austerity measures in Britain may be having an effect. The Office of National Statistics reported on Thursday that the British economy grew by 0.3 percent in the first quarter, a 1.2 percent annualized rate.

That was a revision up from the previous estimate. Contrary to earlier readings, the British economy did not slip into a double-dip recession the last quarter of 2011 and the first quarter of 2012, the office said.

On the Continent, France’s official accounting agency warned on Thursday that France would need a severe dose of austerity in the form of spending cuts, saying the country could no longer rely on tax increases to fix its finances.

The state’s Court of Auditors noted that public finances had been held in check for several years through higher taxes and spending control. But it said the policy had reached its limits.

If the country’s budget deficit is to reach 3 percent of gross domestic product — the European Union target — by 2015, structural spending cuts “on the order of” 13 billion euros ($17 billion) will be needed in 2014, along with 15 billion euros of cuts in 2015, the report said.

The challenge is to rein in public spending in a country with generous welfare and pension benefits and a bloated public sector. France’s social spending last year was among the highest in the world, at more than 30 percent of gross domestic product, according to Philippe d’Arvisenet, global chief economist at BNP Paribas. “It’s getting more difficult to afford this type of generosity,” he said.

Public spending made up 56.6 percent of gross domestic product last year, the auditors found, up from 55.9 percent in 2011 and just below the record high of 56.8 percent set in 2009. Tax receipts, meanwhile, rose to a record 45 percent of G.D.P. in 2012.

“Everyone agrees this is where the next effort has to come from,” Gilles Moëc, an economist at Deutsche Bank in London, said. Cuts on the scale suggested by the auditors are “doable,” he said, at just over 1 percent of G.D.P.

The government has essentially conceded the point in recent months, he said, but it has not provided any details about how it intends to go about doing it.

France’s problems partly result from the economic downturn. The French economy contracted by 0.2 percent in both the first quarter of this year and the last quarter of 2012. Insee, the national statistics institute, predicted last week that it would shrink by 0.1 percent this year.

The government’s forecasts are still more optimistic than some private forecasts. Standard Poor’s estimated Thursday that the French economy would shrink by 0.3 percent this year, before returning to growth with a 0.6 percent expansion in 2014.

Article source: http://www.nytimes.com/2013/06/28/business/global/for-ireland-a-setback-on-the-road-to-recovery.html?partner=rss&emc=rss