Ireland playing fiscal catch-up, says Economist

IRELAND’S economic success was down to playing catch-up after 50 years of mismanagement, leading British magazine The Economist said yesterday.

The economy will struggle to find ways to keep its momentum going and remains at risk to a property crash that could destabilise Irish banks, according to the magazine’s latest survey of the Irish economy.

Economist Europe editor John Peet said that Ireland’s apparent miracle reflected a country catching up with neighbours that had played their economic cards more successfully.

Ireland’s success was caused by “putting things right that were got wrong before,” said Mr Peet, who added that government policies, access to the single European market, high levels of foreign investment and a well-educated workforce all played their part.

But the main reasons driving the surge in economic activity were once-off events. Favourable demographics and greater participation by women in the workforce, which allowed the numbers at work to jump from 1.2 million in 1993 to 1.8 million in 10 years, could not be relied on to deliver a strong economic performance.

Ireland had historically underperformed “more efficient, better-organised neighbours”, causing it to slip back from a position where it was as wealthy as most European countries when it became independent in 1922.

The survey said Ireland would need to work hard to keep up the performance of recent years and would need to concentrate on improving productivity growth, especially in the provision of public services.

A population that was beginning to age, coupled with the loss of the advantage of lower labour costs, meant the country would need to shift to high-skilled, high value-added activities.

Mr Peet warned Ireland’s membership of the euro zone left it exposed to interest rate hikes that would hurt the housing market.

The euro was good for Ireland but costs of membership “could be quite tight for Irish industry” if exchange rates made Irish exports uncompetitive.

A property crash was singled out as the biggest threat to the economy. Ireland’s inability to set its own interest rate meant it could not curb the house price bubble, while record levels of new housing coming on stream meant the construction sector accounted for 15% of national income - double the level in Britain.

Main Points

Ireland in 1922 “as rich as most European countries and only a bit poorer than Britain.”

Ireland in 1988 an economic failure headed for “catastrophe”.

House price crash repeatedly predicted.

Boom thanks to playing catch-up “after years of falling behind.”

Success came about through one-off changes, not productivity growth.