“The euro was a fair weather currency. There were problems we did not anticipate, and we do not have a provision for a lender of last resort,” said Bruton.
Bruton, who was Ireland’s PM from 1994-1997, shared his thoughts on the eurozone crisis and Ireland’s recovering fortunes in an exclusive interview with The Edge Financial Daily. A year ago, Ireland turned to the eurozone for help, and got a €85 billion (RM365 billion) bailout loan. One year on, the Irish economy has stabilised and started posting growth, though moderate.
Bruton notes two major hurdles to the convergence of the eurozone and the sustainability of the single currency.
First is the need for convergence of economic policy, fiscal policy, and fiscal discipline, which “has been missing in some countries”.
Secondly, there is the need to strengthen the capacity of the European Central Bank (ECB) “to act in a way similar to the Federal Reserve in the US or the Bank of England (BoE) in the UK does... to support liquidity in the market”.
“If you look at the overall debts and deficits of the eurozone countries, they have lower debts and deficits than both the US and the UK. Yet the markets [speculators] are focusing on the eurozone countries. Why is that?” Bruton asked.
“The reason is that the ECB does not have the same capacity to put liquidity into the market in a way to put speculators at a disadvantage, whereas the US and the UK have that capacity with the Federal Reserve and the BoE. Therefore, speculators are less likely to take them [the US and UK] on, even though they have weaker fundamentals than the eurozone,” Bruton said.
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| Bruton says Ireland, the first eurozone state to succumb to the 2008 financial crisis, may be the first one out after charting economic growth of about 1% in the last two quarters amid imposed austerity. |
Ireland has made a remarkable turnaround since becoming the first eurozone state to fall into a recession in September 2008 and getting a bailout in November 2010. It has recorded two consecutive quarters of positive growth in an environment where its PIIGS counterparts, Portugal, Spain, Italy and Greece, seem to be stuck on a downward trajectory.
Ireland may have been the first to succumb to the 2008 financial crisis but it may be the first one out.
“We have made a remarkable turnaround given the depth of the problems that we faced, to be able to get to a point where we have significant economic growth of about 1% in the last two quarters against a background of imposed austerity,” said Bruton.
A report by Goldman Sachs Global Economics shows real GDP for Ireland rose 3.5% in 1H11, driven by strong export growth.
“Usually you associate austerity with a reduction in economic growth to zero or negative economic growth but we have achieved positive economic growth while imposing austerity, which is quite remarkable,” he said.
“The reason we’ve been able to do it is because of the depth and strength of our modern industrial base,” Bruton said. “We have a major presence in the international pharmaceutical industry, a major presence in the international software industry, gaming, medical devices and Internet international services.
“These export-oriented sectors have been able to more than compensate for the reduction in spending resulting from austerity measures imposed by the government as well as private individuals being more inclined to save than to spend,” he said.
Compared with its eurozone neighbours, Bruton said: “Greece obviously has some strengths — tourism and shipping — but it doesn’t have the breadth of industrial technologies as we have, nor does Portugal. Spain has strengths, but doesn’t quite have as broad a base of industry as we have.”
A Central Statistics Office report on Ireland’s external trade dated Nov 16 cited a trade surplus of €4.113 billion in September. It reported that total Irish exports for the first eight months ended August grew by 4.24% y-o-y to €61.235 billion.
Bruton highlights that the export-oriented sectors have been much more secure as they aren’t reliant on the Irish credit market but instead on the purchasing power of people around the world with exports to the US, France and Germany increasing by 8%, 12% and 5% respectively.
Ireland’s export market has become much more diversified. Prior to joining the European Union (EU), Ireland exported roughly 50% of its goods to the UK and 10% to the US.
In 2010, total trade between Malaysia and Ireland was €700 million in Ireland’s favour with most of the exports being trades within multinational companies.
However, the country is still not in the clear yet. Bruton remains concerned over the country’s large sovereign debt, of which a large portion was borrowed to guarantee and recapitalise Irish banks.
“We bailed out banks which had borrowed very heavily from banks in other European jurisdictions. If those banks were allowed to fail and hadn’t been rescued by the Irish taxpayers, it wouldn’t just have been Ireland to suffer, there would have been significant damage done to banks in other European countries,” he said.
Bruton said the Irish government of the day “faced up to this and dealt with the matter at the cost of incurring substantial sovereign debt.”
As a result, Ireland went from having one of the lowest debt-to-GDP ratios in the eurozone of 25% at end-2007 to 96% of GDP at end-2010 with an estimated €148 billion in debt. In its April Stability Programme Update (SPU), the Irish government estimated that at end-2011 debt would rise to 111% of GDP.
Bruton expects debt to continue rising in the short term due to the current budget deficit. The SPU forecast debt to GDP to peak at 118% of GDP in 2013 before declining to 111% by 2015.
“The trouble is once you have a large debt, the interest on that debt adds to your problems. We have to run very fast at times just to stay in the same place,” he said.
Written by Ben Shane Lim, theedgemalaysia.com
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