There's light at the end of the tunnel for Ireland
25 November 2012 by Olli Rehn
'There has been an impressive recovery in Irish exports on the back of a strong rebound in competitiveness that was lost in the bubble years.
With the recent two-year anniversary of Ireland's EU-IMF programme, it is a good time to take stock. It is no exaggeration to say that, in November 2010, Ireland stood at the edge of a precipice. The country was in the midst of a very deep recession, tax revenues had plummeted and confidence in the financial system had evaporated.
Today, confidence is returning. There has been an impressive recovery in Irish exports on the back of a strong rebound in competitiveness that was lost in the bubble years - even if the immediate prospects for further strong growth in exports are limited by the less favourable global outlook.
At the same time, a sustained revival in the domestic economy is still some way off. Households and businesses continue to struggle with the high debts built up during the bubble years, and the scope for fiscal policy to support the economy is constrained by the still fragile state of public finances.
Unemployment has stabilised, but it remains at an unacceptably high level, and is increasingly long-term in nature. Low-income households still face high prices for essential goods and services, despite the fact that costs in many sectors have come down, suggesting further scope for increasing competition in some areas.
The return to growth needs a functioning financial sector, and enormous progress has been made in turning it around. Irish banks have been recapitalised to a very high level relative to their European peers. They are now concentrating more on their core business in Ireland, but have not yet reached full capacity to support the recovery through new lending - including to Irish SMEs, which play a key role in future job creation.
We have been witnessing an impressive turnaround in investor sentiment towards Ireland. The decline in spreads on Irish government bonds in recent months has been hugely encouraging, and has enabled the sovereign to begin to re-enter debt markets earlier than envisaged. Ireland has also recently benefited from a favourable change in its rating outlook by one of the three main ratings agencies. This is one of the first positive actions by a rating agency towards a euro area sovereign since the crisis began. There are further signs that favourable sentiment is spreading beyond the sovereign, and it is now easier for banks and some larger companies to borrow again. The return of confidence is an essential step towards a return to growth and job creation.
This turnaround is the reward for the government's strong policy implementation. It has consistently been meeting all its fiscal commitments. Restoring sustainability to public finances is essential if a lasting recovery is to take place.
There has recently been some debate about the impact of fiscal consolidation on the economy. In fact, Ireland's adjustment path has been carefully designed to make most efficient use of the EU-IMF funds, which are provided on highly favourable terms. In the absence of this support, Ireland's budgetary and economic adjustment would be much more severe, making it difficult to maintain high-quality public services.
Moreover, we have been supportive of the government's efforts to utilise resources from the European Investment Bank (EIB) and other sources to finance employment-generating investment projects in a number of key sectors, notably in education. Indeed, following discussions with the government, the programme conditions were modified to allow part of the proceeds from the sale of state assets to be used to enhance the capacity of the EIB to increase its investments in Ireland.
Targeted measures which can underpin an upswing in domestic demand should be encouraged, provided that they are consistent with the overall programme objectives and that the individual projects are appropriately costed and can deliver tangible and lasting economic benefits to Ireland.
The return to growth continues to require the implementation of structural reforms to facilitate the economic adjustment. It is worth recalling that consumers, and society at large, benefit from more efficient services provision. For example, in relation to the public sector pay bill, a careful balance needs to be struck between keeping industrial peace and ensuring that further savings are made in a manner which does not compromise the delivery of essential public services. While sometimes requiring difficult decisions, structural reforms undeniably help to spread the burden of adjustment - as well as the benefits from growth - across different groups.
Indeed, a high degree of social consensus has been decisive for delivery of the Irish programme to date, and I hope it will remain so. The choice of measures is ultimately a matter for the government, and Ireland's programme partners in the troika have consistently engaged in dialogue with all social partners, emphasising that the adjustment should be as equitable as possible and that the burden on the most vulnerable should be minimised.
The Irish people have shown strength and endurance in resolving one of the largest financial crises in recent years after the bursting of the credit boom. The burden on Irish taxpayers of the various banking support measures is high, but bank shareholders (including shareholders of foreign banks in Ireland) and subordinated bondholders have also taken serious losses.
Preserving financial stability in the economic and monetary union has been a fundamental objective for the European Commission since the start of the crisis. Europe has made significant progress in crisis resolution, most recently with the inauguration of the European Stability Mechanism and the European Central Bank's decision on outright monetary transactions, which can benefit countries regaining market access when exiting the macro-economic adjustment programme.
I welcomed the June 29 commitment of euro area leaders to sever the link between banks and sovereigns and its call for the Eurogroup to examine the situation of the Irish financial sector with a view to further enhancing the sustainability of the well-performing adjustment programme. Progress is being made towards the implementation of these commitments to find the right solution for Ireland.
Ireland's strong track record of implementing reform and the solidarity from its European and international partners have been laying the foundations for returning to sustainable growth and job creation, and there is good reason to be confident that Ireland will soon be able to stand on its own two feet again. It has been a tough time for the country. Two years ago, when Ireland was on the point of entering the programme, I quoted the Finnish proverb that "even the longest night will be followed by a new dawn". Now there is light on the horizon.