March 29, 2024

Ireland Said to Face Downturn in 2nd Year of Austerity

Ireland cut its deficit to about 10 percent of gross domestic product in 2011 from 32 percent in 2010, the year that a government plan to bail out six of the country’s largest banks inflated the deficit, according to the report by the European Commission, the European Central Bank and the International Monetary Fund.

The Irish economy will grow only about 0.5 percent this year, down from a forecast of 1.1 percent just two months ago, as the country’s troubles keep unemployment high and prompt Irish consumers to tighten their purse strings, the report said.

But the reduction in the deficit is striking, and Irish officials hope it will persuade investors that Ireland is once again becoming creditworthy enough to borrow in financial markets as soon as next year at interest rates the country can afford.

Ireland had to take a bailout of 67.5 billion euros (about $87 billion) from international lenders in November 2010 after investors, fearful of the country’s deteriorating finances, drove borrowing costs above 8 percent, about the same levels that led Greece to take a bailout a few months earlier. By contrast, Ireland is paying only 3.3 percent on the bailout money it receives.

Michael Noonan, Ireland’s finance minister, struck an upbeat tone, saying in a statement that the report “illustrates the ability of the Irish state to implement a challenging program effectively.”

The report was issued as European leaders, like Mario Monti, Italy’s new prime minister, and President Nicolas Sarkozy of France are starting to argue that austerity alone is not an answer to Europe’s financial problems.

While the financial markets had an outsize influence in pressuring European leaders to embrace austerity as a way out of the sovereign debt crisis, there has since been a shift in sentiment. Now, investors are increasingly worried that too much austerity is hampering growth, creating a vicious cycle that will make it harder, rather than easier, for Ireland and other weak euro zone countries to pay down their debts and deficits.

This week, Mr. Sarkozy met with French unions and business representatives to discuss how to improve the country’s competitiveness, increase growth and create jobs. In Spain, the new government is forging ahead in changes to labor laws, including trying to reduce wages, in a bid to bring investors back.

Mr. Monti recently told Chancellor Angela Merkel of Germany that if the Italian government were restrained from stoking growth, Italians could soon march in greater numbers in the streets against a multibillion-euro austerity plan that Germany and others want the country to embrace in a bid to avoid Ireland’s fate.

Ireland has been held up by Germany and other European countries as a model of how to tackle austerity. The country had a small growth spurt last year after three years of contraction, largely because of a surge in exports from pharmaceutical companies, which have a strong base in the country because of a low corporate tax rate of 12.5 percent.

But the rise in exports was not accompanied by huge numbers of new jobs. And a worsening economic environment in Europe — the region is expected this year to experience its second recession in three years — is likely to slow the pace of Irish exports.

Despite the progress in reducing its deficit, “Ireland nonetheless faces considerable challenges,” the report from international lenders said.

Article source: http://feeds.nytimes.com/click.phdo?i=7c91237d6a8d8028657d872ea46eb3d6

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