Celtic tiger still cowed

Ireland won much praise for its early efforts to deal with the deficit the former ‘Celtic tiger’ accumulated during the credit crisis, but its economy remains in severe difficulties and the pressure to continue enacting austerity measures continues.

The latest chapter in Ireland’s ongoing debt saga centred on Anglo Irish Bank, which needed new bailout money that brought the Irish taxpayer’s bill for keeping the lender afloat to €29bn to €34bn. That pushed Ireland’s deficit up to 32% of GDP.

Ireland is also plagued by the possibility of a double dip recession. It has already experienced a quarter of contraction, by 1.2% in the second three month period of 2010, following its recovery from recession. Another period of contraction in the quarter just finished would mean Ireland is now officially in recession.

Some indicators are already pointing to a double dip. Manufacturing activity in the country contracted in September, with the purchasing managers’ index falling to 48.4 from 51.1 in August. A reading below 50 indicates contraction.

The Purchasing Managers Index for the services sector, Ireland’s largest, fell to 48.8 in September from 52.9.

The Central Bank of Ireland has forecast total economic growth this year will be just 0.2%, against previous expectations of 0.8%, and has also urged the government to continue tackling the country's budget deficit, the worst in the EU.

Most pressure on authorities to deal with the shortfall has come from European bodies.

European Central Bank (ECB) president Jean-Claude Trichet said that in return for ECB loans that have saved Ireland’s banking system from collapse, it needs to take action on its deficit.

But austerity measures, which have included public sector job cuts and pay freezes, have provoked widespread opposition among the Irish public, including public demonstrations and strikes.

While some in the UK point to Ireland as an example of how to deal with a large deficit, others say its continuing woes demonstrate that such measures are not a path to be followed.

Economist David Blanchflower, a former Bank of England policymaker, observes that the Irish government’s borrowing costs have increased sharply as a result of its austerity measures. With the spread between Irish and German 10-year bond yields widening to record levels, investors are demanding ever greater returns in exchange for lending money to the Irish government, he notes.

Prime Minister Brian Cowen’s popularity has been plunging as the crisis continues, but the government remains adamant that there is no alternative to its austerity drive.

Next month, leaders will unveil a four-year plan for reducing the country’s deficit to below 3% of GDP.