Irish prospects Premium

There has been much concern about Ireland recently. This month its population voted against the European Union’s constitutional treaty, sparking speculation that the country might be booted out of the union. On Tuesday the influential Economic and Social Research Institute said it expected Ireland to experience its first recession since 1983.

Talk of ousting Ireland from the EU, just when it is on the verge of becoming a net contributor to its budget, seems overdone. Although benchmark bond yields have inched up since the vote, it is the economy that is causing more gloom among investors. As house prices fall, inflation is soaring. About one in eight workers is employed in construction, so a collapsing property market has hit domestic demand. The economy is very open – exports represent more than two-thirds of gross domestic product. A strong euro and a slowing US, which takes a fifth of Ireland’s exports, is thus a nasty combination.

The negatives, though, are well known, and risk overshadowing the economy’s underlying resilience. Households’ real income, even after servicing debt, has risen sharply. Falling house prices may therefore not have as severe an effect on consumption as in the UK or Spain. And, more crucially, the government’s books are in good shape. Net government debt, taking into account contributions to a fund to pay future pensions, is estimated by Moody’s at just 14 per cent of GDP, a level to make Gordon Brown weep with envy.

Fiscal flexibility has important implications. The demographic time bomb, thanks to the government’s pension planning and a relatively young population, will go off later than elsewhere in western Europe. An ambitious public investment programme may have to be pared down, but will still support the construction sector and improve the economy’s growth potential.

A recently published book by Robert Shapiro argues that, as the rest of Europe sinks into sclerosis, only Finland, Sweden and Ireland may buck the trend. Writing off the Celtic tiger looks extremely premature.

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