Fisher Investments Editorial Staff
Deficits, Developed Markets

Eyeing Ireland

By, 09/20/2011

Greece continued grabbing headlines Monday as the government rushed to meet the IMF/EU/ECB troika’s demands for credible deficit reduction. Fears of a Greek default have escalated this month, and yields elsewhere in the eurozone periphery have ticked up at the same time, perhaps in sympathy. Yet that doesn’t mean default risk runs high in those nations—all PIIGS aren’t created equally. For example, Ireland lacks many of Greece’s structural problems, and it’s made substantial progress since its November 2010 bailout.

While Greece’s fiscal crisis largely resulted from years of an uncompetitive economy—stemming from mostly socialist economic policies—Ireland’s grew largely from a banking crisis. In 2010, Irish banks were in dire straits. The government had already pumped huge amounts of money into the banks, ballooning the deficit in the process. As recapitalization attempt after attempt proved insufficient, Ireland borrowed more—and more expensive—money. Hence the government turned to the EFSF—borrowing roughly €90 billion and committing to reduce annual deficits from 32% of GDP in 2010 to 3% of GDP by 2015.

It’s been a difficult road, but Ireland’s deficit reduction program seems to be on track. Tax revenues exceeded the August target by about 1% and are more than 8% higher than one year ago—over which the deficit narrowed by more than €1.6 billion. A stark contrast to Greece, which many feel lacks a credible plan over a year after its bailout. And while Greece remains locked in recession—its economy contracted -4.8% y/y in Q1 and -6.9% y/y in Q2—Ireland’s GDP rebounded +1.3% q/q (+0.1% y/y). Q2’s growth estimate hasn’t yet been released, though much of the monthly data trended positive.

Why the difference? Most importantly, Ireland is structurally much more business-friendly and therefore, competitive. The World Bank recently rated Greece the 109th easiest country to do business in, barely squeaking by Bosnia-Herzegovina. Ireland is ninth. Greece is 149th out of 183 ranked countries in ease of starting a business. Ireland? Eleventh. Ireland’s corporate tax rate is 12.5%, about half the eurozone core’s prevailing rate (likely partly why several large international companies make their EU headquarters there). In no small coincidence, international trade has benefited Ireland greatly of late. Tellingly, when negotiating Ireland’s bailout, other eurozone members felt Ireland’s corporate rate was too low and pushed for an increase. Ireland demurred.

Ireland also had a head start on privatization, shedding over €8 billion in state-owned assets between 1991 and 2006. It also boasts more effective tax collection and lacks Greece’s rampant corruption and bloated public sector. Greece entered its crisis with hundreds of outdated government agencies bleeding cash; its government employed around 40% of the total workforce before cuts began and remains heavily centralized. Ireland’s government workforce was less than half that size entering 2011.

Granted, Ireland’s not out of the woods. Significant progress must be made, and there’s still risk its banks will need more capital injections. But Ireland isn’t Greece—nor was it at the outset of the PIIGS problems. And thus far, Ireland seems on track overall, showing there is a way back for troubled peripheral nations, provided they take the necessary and appropriate steps.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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