Should Ireland heed the ECB’s warning?

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Sometimes it appears that everyone has been queuing up to laud Ireland’s return to economic health save the Irish themselves.

Enda Kenny and Fine Gael are not riding a wave in popularity, but are instead achieving record-low levels of support in polls. Political upheaval – not usually seen during times of impressive economic growth – is on the cards, and the traditional players in Irish politics now have less than half of the country behind them. Recent weeks have seen mass protests against the government.

All of this is directed at a government that last year led Ireland to become the first eurozone country free from their international bailout. That is forecasting 4.7% economic growth next year, the highest figure in the eurozone by some margin. A government that has seen GDP increase over 6% in the last year, with unemployment dropping.

The all-too-apparent problem is that Ireland’s economic performance has not yet been fully felt by the people. Most significantly, wage growth is still thin on the ground, meaning businesses are getting richer but employees are not. The government’s decision to push through its proposed water charges was perhaps not the best way to sate a public thirst for loosened austerity measures.

A government that deeply needs to follow through on its promise that austerity policies are now a thing of past will be troubled by the latest words from the European Central Bank (ECB). Despite Irish attempts to reduce its deficit remaining on track, the ECB and EU have urged Irish ministers to do more to cut its debt.

In the run up to a general election by April 2016, more austerity measures may be the final nail in Fine Gael’s coffin. But do they need to listen to the warning from Europe?

Irish debt is certainly high, even after years of deficit reduction and with GDP growing so dramatically. The current forecast deficit reduction is to 110% of GDP by the end of the year. Whilst within target, that still leaves Ireland in a club of countries with deficits exceeding GDP. That club also counts poor performers Portugal, Spain, Italy and Greece in its membership.

The basis of the ECB’s declaration – that growth could yet be undermined by weakness in the eurozone or faltering exports – also carries some truth. Recent weeks have served as a reminder that European attempts at an economic recovery are still fledgling. Mario Draghi may be hinting at quantitative easing, but has as yet not actually committed himself to it.

Worse yet, many emerging stories for 2015 may come to clip the Celtic Tiger’s claws. For all the bluster from the Troika about its role in bringing about growth, Ireland’s export market still relies heavily on the US and UK. That Ireland has performed well as those countries have outperformed their European rivals is no surprise: and whilst US growth for now remains on course, the UK has a number of problems to deal with.

Not least, a general election which may well lead to heightened calls for a referendum on British EU membership. David Cameron has promised as such if he wins an outright majority, whilst any major victories for UKIP would also bring the subject to the fore. The impact of such a referendum on the British economy – and thus onto Ireland – is unknowable, but potentially catastrophic.

Politics may also play a major part in the economics of the eurozone next year. With Russia’s financial forecast looking increasingly bleak, the policy from European leaders of pursuing sanctions over Ukraine will come to hurt it: 300,000 jobs in Germany alone depend on Russian trade.

However, to only cover the possibility of detractive factors arising from outside Ireland’s borders is to focus too heavily on the negative. After all, Ireland has shown an ability to grow its economy in the past. In doing so, it has recovered from worse positions than this. And some may question whether the words of the European Union have be undermined by the Trichet saga, possible evidence that those in Europe may not always have solely had Ireland’s interests at heart.

Clearly, Fine Gael enters the final straight of its current term in office with some stark issues that it cannot shy away from. To appease the ECB means balancing a need for living standards and wealth to rise across Ireland’s population with a commitment to lowering debt yet further. To ignore them means risking a recovery that’s been the crux of their time in power. Those at home, over in the UK and on the continent will all be hoping that they can make the right decisions.

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