Ireland’s economic woes leave Emerald Isle blue

Ireland’s economy offers little to celebrate this year on St. Patrick’s Day.

The Emerald Isle’s output will likely decline for the third year in a row in 2010. And the national unemployment rate is still rising, approaching 13 percent.

The brutal downturn has exacted a nasty toll on an economy that was hailed as Europe’s “Celtic Tiger” before its housing and construction bubbles burst in 2007. Today’s jobless rate of 12.7 percent is one of the highest in the European Union.

By some textbook economic definitions, Ireland’s plight qualifies as a depression.

After declining by 3 percent in 2008, Irish GDP plummeted 7.5 percent last year, and it will likely drop 1 percent in the first half of 2010, said Barry O’Leary, chief executive officer of Ireland’s Investment and Development Agency, which seeks out foreign investment.

Mr. O’Leary and most economists expect growth will return during the second half of this year.

With exports totaling 90 percent of its GDP, Ireland’s trade-dependent economy got clobbered by the global recession and the collapse of world trade.

The nation and its 4.2 million residents also suffered from massive corrections that followed the collapse of its overheated housing and construction markets, said Howard Archer, chief European economist for IHS Global Insight. Those corrections, in turn, severely weakened Ireland’s banks.

“Ireland was certainly one of the hardest hit of all the European economies, if not the hardest hit,” Mr. Archer said.

In several ways, Ireland set itself up for its big fall. As pay increases outpaced rises in productivity during the decade before the downturn hit, Ireland became less competitive.

Meanwhile, a decade of double-digit price rises in the housing market produced a huge bubble. Since peaking in early 2007, Irish housing prices have plunged about 30 percent, dragging down the banking sector in the process.

The downturn has dramatically worsened Ireland’s fiscal position, as its budget deficit soared to nearly 12 percent of GDP last year and will probably remain above 11 percent this year as GDP continues falling, Mr. O’Leary projected.

But Mr. Archer also insists tough government measures mean that “the worst is over.”

“Ireland has taken very strong action to rein in its public finances,” he said.

The government has slashed its spending and raised taxes. Since 2008, salaries of civil servants have fallen an average of 12 percent, Mr. O’Leary said. Raising personal income taxes on falling incomes has added further pain. Ireland has retained its relatively low corporate tax rate of 12.5 percent, which has been instrumental over the years in attracting so much foreign investment.

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