Judy Asks: Ireland Saved Itself, But Can It Save Europe?

Ireland presents a shining example in this European crisis. After years of financial imbalances, Dublin quickly asked the IMF, EU, and ECB, the so-called troika, for international support. Ireland adopted austerity measures suggested by the troika in the most correct way and won its battle. It asked to keep the corporate tax rate at a level of 12.5 percent. Today, after two years of suffering, Ireland has successfully returned to the bond market. This year, when it holds the presidency of the EU, Ireland has one mission: to bring Europe's leaders through the most critical phase of the crisis. Now is the time of growth, of investment. Unfortunately, Ireland can only show the way to EU leaders. They are the ones that have to walk it. The ECB has crystallized financial markets with the Outright Monetary Transactions, the new bond-buying program to support EU countries in turmoil. Despite this, time is running out and without governments’ efforts on reforms, the crisis will restart. Ireland may be moderating the discussion, but the absence of useful decisions until the German elections, scheduled for September 2013, creates a major risk.

The year 2013 is when we discover whether Ireland really is the poster child of successful troika bailout programs as Ireland’s program ends and the country tries to return to the bond markets. There have been some promising signs that Ireland might succeed in proving all the doomsayers wrong. In 2012, both the Irish government and Bank of Ireland successfully borrowed in the markets and earlier this week the Irish government announced it will be issuing medium-term debt (5 year bonds) in the markets. Ireland consistently outperformed the region according to the Purchasing Manager’s Index, which saw Ireland’s manufacturing output expand while there was a decline in the rest of the eurozone (EZ).

Still, there is reason to believe Ireland is not out of the woods yet. With unemployment stubbornly high and mortgage arrears continuing to rise, domestic demand will remain sluggish at best next year. Ireland’s biggest export markets (the EZ, the United Kingdom, and the United States) are set for recession or lackluster growth next year as well, so they will not prove a robust driver of growth. The troika has promised to allow the European Stability Mechanism (ESM) to recapitalize banks directly and assume some of the legacy debt. This probably will not happen until 2014, and in any case would only offer Ireland a small amount of debt relief. Far greater debt relief could come from a restructuring of Ireland’s twenty-eight billion euro in outstanding promissory notes. In my view, a promissory note restructuring by March 2013 could make or break Ireland’s prospects for returning to the bond markets unaided next year.

As for Ireland saving the rest of Europe, that's a long shot. Ireland has throughout this crisis been extremely vulnerable to developments elsewhere in the region. So far, European policymakers have not been swayed to take a particular stance for Ireland's sake. When Ireland received a reduction in the interest rates on its bailout loans, it was on the back of Greece getting a deal on lower interest rates. Direct bank recapitalizations by the ESM were not designed specifically for Ireland, but will eventually benefit the much larger Spanish economy as well. Ireland's role in the eurozone crisis has been to play the model student and do exactly what has been asked of it by the troika. The jury is still out on how well this has served the country.

Ireland as EU president has a double act to play: bring Europe out of the euro crisis and find a solution to Ireland’s own debt burden. In reality, they are interconnected: saving Ireland could help save the EU.

Traditionally, Ireland has been showcased by the EU as a success story. When it entered the EU forty years ago, it was a poor country. That rapidly changed in the following decades branding it as the Celtic tiger and highlighting the benefits of the EU’s internal market and transfer mechanisms such as the cohesion funds.

Ireland’s poster boy role in the EU got damaged by the financial crisis which hit Irish banks particularly hard. Their bail-out now strains the public coffers, although economic growth has been picking up already.

The discussion is now how much the EU and particularly Germany are willing to reward good behaviour and find flexible solutions to alleviate Ireland’s public debt. It won’t come easy. Germany is entering an election cycle, increasing reluctance to make big concessions that can appear as if Germany would be picking up the tab for others. Still, helping Ireland beyond a pure short economic calculation or electoral blowback might be worth it to the EU and Germany.

It would provide a much needed success story after long months of purely negative stories on Europe.

It would show light at the end of the tunnel to other debt-cutting countries around Europe, and that Europe doesn’t only work with sticks, but also with carrots. Ireland would be the light at the end of the tunnel for Greece and other debt-straddled countries.

Finally, it would also stand out as a nice historical loop of European solidarity. Ireland was presiding over the European Community in 1990 when the thorny issue of German reunification arose. If Ireland in 2013 presided over a solution that would pave the way for its own recovery (with German acquiescence and its helping hand), that would have positive ripple effects for the EU. The eurozone could even end the year with more members of the euro (Latvia joining on January 1, 2014) not less, contrary to the prediction of many pundits.