Our progress is dented by eurozone weakness

Although the credit rating agencies have serious questions to answer about their role in the global economic and financial crisis that is now around five years old, their utterances still attract a lot of interest and are still very influential.

Consequently, what they say has to be taken seriously because they actually still exert considerable market influence over how investors regard countries and companies. After a prolonged period of consistently negative comment about Ireland, it was somewhat encouraging that one of them, Fitch, actually made some relatively positive comments about Ireland this week.

Fitch suggested Ireland’s recent successful debt issue has added to its positive credit momentum and improves the country’s chances of making a full return to the international bond markets later this year. Despite this, the agency is still somewhat concerned about Ireland due to the still large fiscal deficit and the threats posed by the intensification of the eurozone debt crisis. While Ireland is making solid progress, these are valid concerns, particularly the threat posed by the eurozone mess.

Despite the fact the markets have become much more stable and sanguine in recent weeks, the eurozone debt crisis is still a very real issue and once the markets return to normality after the summer break in September, it is likely that the crisis will become a key focus of attention and source of instability again. The problems will require much braver remedial action than we have seen thus far.

The markets took some consolation from the utterances of the ECB in early August, but it remains to be seen what ECB president Mario Draghi’s plan to buy short-dated bonds will look like, or indeed if it will be effective.

Other challenges ahead include the ruling by the German constitutional court on the legality of the euro area permanent rescue fund on Sept 12, and the Dutch general election.

Of course, the biggest problem for the whole system is the dire economic background in the euro area. Data released earlier this week were not as bad as expected, but the overall euro area economy contracted by 0.2%. On the positive side, Germany expanded by 0.3%, the Netherlands expanded by 0.2% and French growth was flat. On the downside, Italy contracted by 0.7%, Spain by 0.4%, Portugal by 1.2% and Belgium by 0.6%.

In every sense, the eurozone is evolving into a two- tier union and it will prove very challenging to keep it all together over the next couple of years. There is a fundamental growth problem in most of the eurozone and until this is rectified, sovereign debt issues will remain very problematical.

The aforementioned external factors will pose a very considerable challenge to Ireland’s export sector over the months ahead. In the first five months of 2012, the value of merchandise or physical exports was 0.1% down on the same period last year, but somewhat reassuringly, in May, exports were 2.3% ahead of the same month last year.

In May, chemicals and related products accounted for 60% of total exports that month.

However, the patent issue is having an impact as blockbuster drugs come off patent — in the first five months of the year the total exports of chemicals and related products were 3.1% down on the same period last year. Food and live animal exports fell by 3.1% in the first five months also, proving that we shouldn’t get too carried away or complacent about that sector.

There is no doubt but that maintaining the current export performance will prove challenging over the coming months, but it is essential that every effort be made to continue to grow the export base, help indigenous exporters to build markets, and continue to push the competitiveness agenda.