Is Ireland A Model For How The West Can Recover?
Lower salaries and a well-structured bailout have made Ireland competitive again, though its export-driven growth is still vulnerable to the fallout of a reeling world economy. Looking for signs of a way out for us all.
DUBLIN - Julie O'Neill says her job was never as easy as it is today. In 1997, she began staffing the new European headquarters in Ireland for Gilead, the US pharmaceutical company. Gilead had selected Ireland as its European base because its workforce was English-speaking and highly educated.
Yet it was precisely such folk who, during the boom years, were increasingly difficult to find. O'Neill says that Ireland lost its competitive edge before the financial crisis. Average salaries doubled between 2000 and 2007. Not only did workers expect extremely high remuneration, but the prices of real estate, and energy and supplier costs, made Ireland increasingly unfriendly for busines.
So in some ways, the 45-year-old top manager says, the financial crisis was a good thing. Since the market imploded in 2007, production at Gilead has been booming. O'Neill has increased the workforce since then from 120 to 200. And the US company invested 48 million euros in a new 16,000 square meter factory in Cork.
Costs have dropped 12%, while turnover has risen 30% over the past three years. Today, Gilead makes 350 million pills – HIV and AIDS medication – in Ireland. That adds up to about 40% of the company's global turnover.
Finally, buoyed by turnaround stories like this, there's hope in Ireland again. In the first quarter of this year, the economy grew a surprising 1.3% -- well above the 0.5% forecast – and the strongest quarterly growth since 2007. The billions in bailout cash from the International Monetary Fund (IMF) and the European Union seem to have done the trick.
In fact, the Irish government got better results this year than the IMF and the EU were expecting. The main cause of the fall of the "Celtic tiger" had been the banks, which had been overstretched from bad real estate loans.
In the face of a drying up of private investment, the Irish had to pump 70 billion euros, or 45% of their yearly economic output, into their rickety financial sector. So the recent injection of 1.1 billion euros into the Bank of Ireland by a group of institutional investors was greeted with something akin to euphoria.
The money saved the country's largest bank from nationalization, long seen as unavoidable. And economists and investors no longer lump Ireland in the same category as Greece or Spain.
The country is rediscovering its footing with the same exports that were the source for its roaring growth beginning in the 1990s. Ireland had become a favorite location for multinationals thanks to a mix of low taxes, high education and English speakers. Shiny new European headquarters – and factories – for multinational producers of semi-conductors and pharmaceuticals accounted for some one-fourth of its economic growth in the boom years.
Exporting more than before the crisis
Now, Irish companies have again dramatically increased foreign sales since the middle of last year, and exporting more than before the financial crisis.
Three years ago, exports counted for less than 10% of economic performance – that figure has now doubled. In fact, some international companies are complaining of a lack of qualified workers. State-run RTE radio reported in June that 150 of the country's largest firms were willing to increase salaries by 2%. Although unemployment, overall, is still at a record 14%, there is a shortfall of qualified workers. "Our German member companies in Ireland complain of not being able to fill open positions," says Ralf Lissek, who heads the German-Irish Chamber of Industry and Commerce in Dublin.
More than 100 positions are unfilled at German companies SAP and Allianz. Part of that is due to the "loser image" slapped on Ireland in the past three years: with the spectre of the state's possible bankruptcy, failed banks and austerity programs, Ireland lost its sex appeal as a destination for highly qualified foreign workers. "Yet economic performance per capita is still higher in Ireland than it is in Germany," says Lissek.
Still, high dependence on exports could end up easily backfiring, as recovery in Ireland is inevitably linked to a turnaround in the world economy. The crisis of confidence in the U.S. is a worry to any country, like Ireland, heavily dependent on its exports. Ireland's domestic sector would be unable to support growth on its own, as consumers are spending less due to lower salaries and lingering unemployment.
In addition, many households are paying off debts accumulated during the boom years. Before the crisis, the savings rate was 2%; it's now 13%. Consumer spending, meanwhile, continues to slide as it has every month since last year.
The pharmaceutical executive O'Neill says that the single biggest priority now is to increase confidence, adding that the encouraging figures of the past few months have already helped a lot. "Wherever I go, the mood is better than it was a year ago."
The Irish accepted the fact that the government's austerity measures were necessary, and these are beginning to bear fruit. With discipline and hard work, they‘ve overcome other crises, and says O'Neill, expect to get through this one.
Critical for Ireland will be the way the euro debt crisis unfolds. If it spreads from Greece to Italy or Spain, finance markets might lose confidence in Ireland as well. However, the decisions made at the euro summit held in late July were in Ireland's favor: risk spreads for long-term Irish government bonds decreased considerably. And the country was also largely unaffected by the rampant unrest in the markets these past few days.
Economists are even expecting Ireland to be back on the capital market by next year. Says Holger Schmieding, chief economist at Germany's Berenberg Bank, says Ireland could be financing itself on the markets in one year's time: "Ireland could be the first country to leave the debt crisis behind," he said.
Read the original article in German
photo - johnson1952