Ireland Grows Again

By rights, the markets should hate Ireland. Just look at the record. Not so long ago the country was Europe's economic pacesetter, held up as an example of how a small, open, export-driven economy with a flexible labor force could compete in the world market. But the praise was premature. A wild lending-and-spending binge ended with a burst housing bubble and the near collapse of its banks. By last year, Ireland, the one-time Celtic Tiger, was being lumped in with the Southern European nations of Portugal, Italy, and Greece as one of the "PIIGs"—a group of big-time losers whose feckless behavior threatened the future of the entire euro zone.

But while its fellow swine are still mired in muck, the Irish, by contrast, now look set to escape the sty. As Greek bonds drew global headlines for tanking last week, Irish 10-year bonds remained a popular choice, in part because of Ireland's serious efforts to get its deficit under control. Last month the president of the European Central Bank, Jean-Claude Trichet, called Ireland a "role model" for Greece in terms of its readiness to confront "extremely difficult problems."

Of course, those problems remain. Last year Ireland's GDP plunged 7.5 percent, the steepest dive in the nation's history. Unemployment has reached 12.6 percent—2 points higher than in Greece. Emigration, the old Irish scourge, is rising again. The budget deficit stands at 11.7 percent of GDP—a figure barely lower than that of Greece. What's more, Ireland has some nasty problems that even the Greeks don't share. The crash left its major banks in need of expensive rescue and the Irish with a level of household debt almost unmatched in Europe.

The difference is that Ireland can offer honesty and the gritty resolve of its coalition government. There's no Greek-style fudging or finger-pointing at the demons of Anglo-Saxon capitalism. Instead, the Irish have launched an austerity program of startling severity, raising personal taxes and cutting spending. In this year's budget the welfare bill was slashed by a third. For the entire civil service, whose incomes soared in the boom years, the average pay cut was 7 percent. There's a public-sector recruitment freeze, and thousands of jobs may disappear. At huge expense to the taxpayer, a new "bad bank" is taking on the most toxic of the commercial banks' assets. Sheer necessity helps explain Ireland's urgent response. When the emergency budget passed last year, Ireland was alone on the edge of the abyss.

John Fitzgerald of the Economic and Social Research Institute in Dublin says: "There was a widespread public perception last year that the government had made an appalling mess. Unless action was taken, Ireland would go bust." Unlike the Greeks, the Irish never believed that the answer lay with a bailout from fellow Europeans. Besides, an already unpopular government had little to lose, especially when there was no imminent election to worry about.

Irish workers have also shown a rare understanding that the country's plight demands sacrifice. So far, the cuts have been accepted without the serious strikes or even rioting that the threat of belt-tightening often provokes elsewhere in Europe. Under the latest deal with union leaders, public-sector workers will trade a government promise of no further pay cuts for a reform package that includes an overhaul of working practices and limits on industrial action.

Unlike in France or Germany, policymakers in Ireland aren't looking at the crisis as an excuse to roll back free-market reforms. In general, the Irish blame themselves for their own problems and failures rather than pointing the finger at capitalism itself. Stuart Thomson of British-based Ignis Asset Management says: "There is a greater conviction among the Irish people [than elsewhere] that the credit crunch was an interruption to the Celtic Tiger phenomenon rather than a game changer." Outsiders looking for a base in Europe are still given the same welcome as before. Foreign investors still enjoy a modest 12.5 percent rate of corporation tax, almost the lowest in Europe.

The first rewards for virtue can already be seen outside the bond markets. The budget gap is no longer widening, and the government reckons that the economy will start growing again later this year, hitting 4 percent between 2011 and 2014. At the same time, falling wages and rents mean Ireland is pricing itself more competitively in the international market. The latest figures show a trade surplus of more than €38 billion last year. Ireland remains a popular choice with U.S. investors, critical to a country that depends on the subsidiaries of U.S. multinationals for approximately 35 percent of its corporate tax revenues. Some pigs, it seems, can fly.