Davy: Tory-Lib Dem deal best outcome for Irish economy

THE Conservative-Lib Dem coalition which has put Tory leader David Cameron into 10 Downing Street is the best general election outcome for the Irish economy, according to Davy stockbrokers.

Davy chief economist Rossa White said the new government is “by far the best deal” in the circumstances for both Ireland and financial markets.

White argues that the Conservative-Liberal government has a large majority, enough to take hard decisions on fiscal policy. “Success in closing the budget deficit will be the defining feature of this government: the noises are positive so far. We expect an emergency budget within a couple of months, going far beyond even the Conservatives’ election manifesto. Sterling has already rallied and that trend is likely to continue as markets give the new government the benefit of the doubt.”

White said Britain faces a similar fiscal challenge to that which Ireland has had to deal with over the last 18 months.

“Funnily enough, there may have been some similarities in terms of government structure. Somewhat like the Green Party in Ireland, the Liberal Democrats have not been in government before. They won’t want to blow the chance.

“In addition, the Liberal Democrat goal of electoral reform may not be immediate: they will certainly want to stay in power long enough to push through the promised referendum. On that basis, it is... worth betting the new government has staying power.” Mr White believes the first test facing the government is setting out a credible plan to significantly reduce the budget deficit from more than 12% of GDP.

“If efforts prove successful, there are a number of implications for Ireland. Sterling would rally, further boosting Irish export competitiveness. Note that Ireland has already corrected its relative price gap (not taking into account the exchange rate) versus the UK by 9% over the last 18 months. The weakness of sterling did much damage, particularly in 2008: a reversal of the trend would be hugely welcome.

“Of course, fiscal retrenchment may mean softer UK demand. But the alternative – a UK fiscal confidence crisis – would be far worse.”