Irish Economy from April 2008 to April 2010 - Case Study Example

Irish Economy April 2008 to April The Irish economy has urguably undergone a metamorphosis from how it used to be around 20 years ago. There aremany factors that can be credited with the success of the Irish economy over the years. The Irish government has done quite a lot to ensure that the economy of Ireland does not crumble completely in the midst of the ongoing financial crisis which has rocked many countries across the globe. Though the economy of Ireland can be said to be more secure than the countrys counterparts in Europe, a lot has happened over the last two years to affect the countrys economic situation in a big way. This paper sets to assess how successful the Irish government and the European Central Bank have been in running the countrys economy over the last two years, that is, between April 2008 and April 2010. The main macro economic policies used by these two institutions in the last two years will also be discussed in this paper. Ireland and the Financial Crisis During the 2008/2009 global financil meltdown, Ireland was not spared; the country underwent one its worst recession in many years. This situation significantly affected all aspects of the economy of Ireland. For one, there was a major slowdown in the construction and property markets, just like it was happening in many other countries. Before the 1980s, agriculture was the main economic backbone of Ireland, but as the country began to grow economically, agriculture was slowly replaced by other services and industries such as the property industry (Central Intelligence Agency, 2009). Therefore, the countrys finsnces were dealt a bif blow when these services and industries became among the first casualties of the economic meltdown. The ESRI 2009 Estimate (Economic and Social Research Institute, 2010) Irelands GDP estimate for 2008 was 191.3 billion US dollars while the 2009 estimates reduced to close to $177.3 billion. Although this was a drastic fall, the coutry remained one of the most economically stable in the world. In fact, Ireland has already been forecast to be amone the top three EU nations with the highest GDP per capita  during the 2008 – 2010 period (Gerald, Bergin, Cenefrey and Diffney, 2008). It cannot therefore be said that the Irish economy is that badly off. According to Daugherty and Jewers (2009), Irelands GDP estimate for 2008 was 191.3 billion US dollarsm while the 2009 estimates reduced to 177.3 billion US dollars. Although this was a drastic fall, the coutry remained one of the most economically stable in the world. In fact, Ireland has already been forecast to be among the top three EU nations with the highest GDP per capita  during the 2008 – 2010 period. Therefore, it cannot be said that the Irish economy is that badly off. The sector that contributed most to the Irish economy between 2008 and 2010 was the services sector which made up 49% of the total GDP. Industry came next with 46% and agriculture had 5%. 67% of the total labourforce was from the servicecs sector, 27% from the industrial sector while agriculture only employed 6% of the total labour force. The unemployment rate for the 2008/2010 period increased drastically mostly due to this unprecedented financial crisis (Bergin, Conefrey and Kearney, 2009). In 2007, there were a total of 2.7 million employed people in Ireland according to Martinez-Vasquez and Vaillancourt (2008). This was an average of 4.5% unemployment rate. In 2007, this rate rose to a litlle above 7% and in 2009, it was at 12%. the num,ber of unemployed people in Ireland is expected to rise even further in 2010 (Martinez-Vasquez and Vaillancourt, 2008). The figure below shows Ireland’s unemployment rate from 1997 to 2009. Unemployment figures according to ESRI, 2009. Public finances have also been deeply affetced by the financial downturn. Tax revenue reduced during the past two years as a result of the fall of the property market. Unemployment has also led to a tax revenue slamp. The government has been forced, therefore, to borrow leading to a deficit of 12% GDP in 2009 (Gerald, Bergin, Cenefrey and Diffney, 2008). Despite the financil crisis that hit the country in 2008, the government managed to contain the debt  to GDP. This ensured that Ireland had the fifth lowest among the Euro nations (Lannoo, 2009). However the countrys real GDP growth fell to new lows of -7.5% in 2009 from the previous years -3%. the table below shows the percentage change in the GDP real growth rate for the period between 2008 and 2010 (Daugherty and Jewers, 2009). The table that follows shows Ireland’s estimated GDP and percentage change rates for 2008, 2009 and 2010. YEAR Date of Information Real Growth Rate GDP % Change 2008 2007 estimates 6.00% ­­-- 2009 2008 estimates -3.00% -150.00% 2010 2009 estimates -7.50% 150.00% Construction is one of the major services and industries which uplift the countrys economic situation. Business investments also make up some of the best income earners for Ireland. The Irish government has gone out of its way to create and implement a numbner of national economic programs which are meant to invest in infrastructure, control inflation rate, promote foreign investment and increase labour forse skills. Back in 2008, the then COWEN government made a bold move to improve the banking sector in the country (Central Intelligence Agency, 2009). According to the world bank, Ireland is one of the best places in which to do business in the world today. The country ranks at number 7 among other 181 countries; this is quite imprtessive considering the kind of financial situation that the country has been in for the last two years. This is also one of the countries that has one of the most open economies in the entire world. Its economic situation is greatly helped by the size of exports it manages every year. It has been ranked among the top three exporters among the EU-15 nations (Gerald, Bergin, Cenefrey and Diffney, 2008). Despite the fact that Ireland is suffering from one of its worst unemployment rates in over a decade, it still remains at the top among the countries with the  most educated and the most skilled workforce in the world. The government and other international bodies are working to implement policies that will help the country get back to its feet financially. The Role of the European Central Bank in Helping Ireland’s Economy The European Central Bank which is mandated with offering financial support to its member countries has had some role to play in the path to financial recovery in Ireland. The ECB has rolled out plans in many different European countries to help in their stimulus plans. The dire economic situation in Ireland in 2008 led to the ECB asking for Stability and Convergence Program from the Irish economic sector. This program was approved by the ECB and amended in 2009 according to Larking (2010). Among other things, the program gives a detailed outline on “how Ireland will eliminate its budget deficit by 2013” (Larkin, 2010). The European Central Bank has also convinced the Irish government to plot and implement a five year plan which should be able to restore balance in public finances once more. To be able to turn around the economy of Ireland within the five years stipulated by the ECB, there is nee to reduce or put to a stop borrowing for day to day expenditure. The capital expenditure should also be high while the government must try to reduce its deficit to less than 3% of GDP according to Larkin (2010). The European Central Bank cannot solve all of Ireland’s economic problems on its own. Domestic policy makers have their own role to play regarding the best solution for Ireland’s economic woes. These domestic policy makers must work hand in hand with their counterparts in the ECB to rescue Ireland from a financial disaster. What the Governemnt is Doing to Protect the Irish Economy The government of Ireland has embarked on the implementation of a number of macroeconomic policies that are meant to secure the financial situation in Ireland. Towards the end of September 2008, the Government put in place a policy that seeks to safeguard the interests of the banking system of Ireland (Gerald, Bergin, Cenefrey and Diffney, 2008). This guarantee came at a cruisial time when Irish banks were facing insolvency propblems brought about by the fall of the property industries. The guarantee was meant to cover senior debts, covered bonds, surbodinate bonds and all deposits. In april the next year, the government proposed the establishment of a National Asset Management Agency which was to halp banks get over their insolvency problems. NAMA was formed to take the large loans from various banks so that they could realize normal liquidity. This was done with the idea that it woould help the country recover economically in the end (Bergin, Conefrey and Kearney, 2009). The Government has also introduced some changes in its 2010 budget in order to curb the effects of the economic downturn in Ireland. According to the country’s department of Finance website, the government intends to introduce a restriction of reliefs or “horizontal measure” in order to achieve an income tax rate of 30% which it terms as being effective. The budget also provides for mortgage interest relief. This means that any loans taken before July 2011 will benefit from this 7-years relief (Summary of 2010 Budget Measures Policy Changes, 2010). The policy changes in this budget also include some expenditure measures that are meant to promote expenditure saving in the government. This means that the government has to put in place measures to reduce expenditure at all levels, including personal level. For instance, according to the Budget Summary of 2010, personal rates are expects to drop by between 8.20 and 8.50 euros weekly. Maternity benefit is also expected to reduce by a maximum of €10 and a minimum of €4.50 for every week. The government also intends to set up provisions which will see the reductions in the grants given to state agencies. It is also expected that the government will reduce its expenditure on Defense, especially on the Naval forces and the Air Corps. The housing and local government funds are also likely to reduce. Major reductions are planned for professional fees as well as public service salaries. The reductions are expected to be between 5% and 8% for salaries between €30,000 and €125,000. The other measure that the government is taking to ensure that the country remains on track for a financial recovery include increasing the minimum age for public service pension to 66 years up from 65 years. According to the Summary of 2010 Budget Measures Policy Changes (2010) the maximum retirement age for people serving in the public service sector is set to rise to 70 years up from 65. The pensions will also be available based on average earnings throughout a person’s career and not the final salary as it is the case today. The investment industry is very crucial to Ireland’s economy and the government has already put in place some measures to protect it. A National Solidarity Bond was introduced by the government to ensure that there is enough financial support for the capital investment program. This bond allows investors to choose to invest in a ten, seven or five year term. There is also provision for the annual payment of interest. As an enticement to the investors to invest their funds inside Ireland, the bond allows them to have a redemption bonus upon its maturity. Investors can choose to invest in lump sum or in different payment periods (Summary of 2010 Budget Measures Policy Changes, 2010). These policy measures are supposed to uplift Ireland’s economy. Some of them offer a short term solution while others offer a long term solution. To avert an economic tragedy like the one that hit the country two years ago, more macroeconomic policies should be put in place. This will ensure that Ireland is well prepared if and when such a tragedy hit the world again. References Bergin, A., Conefrey, T. and Kearney, I. 2009. “Recovery Scenarios for Ireland”. Viewed 18 April, 2010, Central Intelligence Agency. 2009. “CIA World Factbook 2010”. Skyhorse Publishing Inc. Viewed 18 April, 2010, Daugherty, Christi and Jewers, Jack. 2009. “Frommers Ireland 2010”. Viewed 18 April, 2010, Gerald, Fitz J. Bergin, A. Cenefrey, T. and Diffney, S. 2010. “Medium Term Review 2002 – 2015”. No. 11. Viewed 18 April, 2010, Lannoo, K. “Concrete Steps Towards More Intergrated Financial Oversight: the EUs Policy response to the Crisis”. Viewed 18 April, 2010, Larkin, C. 2010. “European Economic Policy and Ireland”. Public Affairs Ireland. Viewed 18 April, 2010, Martinez-Vazquez and Vaillancourt, Francois. 2008. “Public Policy for regional Development”. Routeledge, London. The Economic and Social Research Institute. 2010. “Economic Growth: real GDP” Viewed 17 April, 2010, Read More