Ireland and Greece need separate cure

I found myself deeply disturbed by the smugness of Finance Minister Michael Noonan and the Taoiseach in their pronouncements on Greece over recent weeks.

They seemed to suggest that if only the Greeks would take their medicine the way we did they might be able to expect an equivalent recovery. 

There is no basis for such a belief. The structural differences between the two economies are far too vast.

This is not to suggest that austerity has not been required in both cases. 

Faced with evaporation of the tax base and jittery financial markets, our current government and the previous one did what was required on the budgetary front. 

This positioned us well to take advantage of the recovery in export markets when it came.

In the language of economics textbooks, budgetary consolidation was necessary. But it was not sufficient. Greece and the other troubled eurozone economies differ hugely from us along three key dimensions.

The first is the degree of export orientation. The second is the nature of the exports themselves and the third is the portfolio of destinations for exports.

The massive contraction of the Irish economy in 2008 and 2009 was driven by the almost simultaneous collapse of construction and contraction in our exports. 

The recovery in export markets in 2010 was vastly more important for Ireland than for Greece. Greek exports sum to around 30% of GDP, less than one third of the Irish figure.

These differing degrees of exposure to international trade have another implication that can often be overlooked. Imports also comprise a far higher share of the Irish economy than is the case for Greece. 

Imports bear more of the brunt of fiscal consolidation in Ireland, which cushions us to a degree. An equivalent degree of budgetary consolidation will be far more painful for the Greek economy.

It is certainly true that €1m of a multinational corporation’s exports is less valuable to us than €1m of indigenous exports. However, the scale of multinational exports largely overturns this argument. 

While the value of raw materials sourced from the Irish economy is lower, the payroll bills and corporation tax paid by the multinational sector are higher, as is the value of services these companies source from within Ireland.

Ireland’s recovery has been export-led. The number of jobs directly involved in the production of exports began to recover strongly from 2009, while the domestic economy continued to contract for several more years. 

These export jobs were in indigenous manufacturing and in indigenous and foreign- affiliate services sectors.

Ireland has been in an almost uniquely advantageous position in that we specialise in goods and services for which demand has been buoyant. Pharmaceuticals dominate Irish merchandise exports. 

Computer and information services dominate Irish services exports and agriculture and food of course dominate indigenous exports. 

All of these export categories rose as a share of US, UK, and eurozone import demand from 2000 to date. We have been incredibly lucky in this regard.

The final point working in favour of a strong Irish recovery has been our portfolio of export destinations. Ireland is very unusual in the fact that services exports are about equal in size to merchandise exports. 

Since transmission of services over the internet is almost costless, these exports are less geographically constrained and substantially less dependent on EU and north American markets than other exports.

And Ireland, as is well known, is much more dependent on exports to non-eurozone economies than most of the rest of the eurozone.

The advantageous structural features of the Irish economy are not of course purely a matter of luck. Generations of effort by Irish policymakers, State agencies, and civil society have been part of the equation. 

The Irish medicine cannot be expected to have the same outcome in the case of a patient who suffers from a completely different disease.

Frank Barry is professor of International Business and Economic Development at TCD.


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