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Ireland: Growth With A Divided Government And No Real Alternative To Austerity

Ireland-CapitalsAs a further harbinger of events to come in Europe, the voters of Ireland left the conservative leaning party Fine Gael with the largest representation in Parliament. The problem is the election took place in February and the country has been without a real government since. This situation is the result of an electorate that is so divided, that a political majority has become impossible to achieve.

The two major parties of Ireland that have dominated the political landscape since the 1930’s, have at last overcome their enmity enough to create a minority government. Fine Gael will maintain control with the support of the second largest party Fianna Fail. Three previous attempts to form an official coalition all failed.

The election earlier this year codified the now divided government. Fine Gael was allocated 50 votes in the legislature, with their strongest opponent Fianna Fail receiving 44. Sinn Fein was able to hold onto 23 seats, Labour just 7 and the 34 remaining seats were divided among a number of smaller parties.

Prime Minister Enda Kenny since 2011, leader of Fine Gael as of 2002.

Prime Minister Enda Kenny since 2011, leader of Fine Gael as of 2002.

The two largest parties have never been in a coalition before, despite that they both originate from a center-right ideology. The rivalry can be easily traced to the explosive politics that existed, following the long struggle for Irish independence.

Prime Minister Enda Kenny from Fine Gael will likely be able to hold onto power, if the political arrangement holds. There will a parliamentary election to pick the Prime Minister. The understanding calls for lawmakers from Fianna Fail to abstain from voting, thus allowing Mr. Kenny to receive the largest share of support. This will give him the authority he needs, to create a new cabinet and subsequently a functional government.

As the head of a minority government, Prime Minister Kenny will now have more difficulty in passing controversial legislation. He is expected to receive support from some more independent members of the Parliament depending on the issue, but it cannot be counted on.

Micheál Martin, leader of Fianna Fáil since 2011.

Micheál Martin, leader of Fianna Fáil since 2011.

Prime Minister Kenny has appeared to pay the electoral price for pursuing policies of austerity, but he has survived. His party although losing its majority, still ranks as the largest voting bloc in the legislature. It also indicates that Irish voters are grudgingly acknowledging, that there is no real alternative to austerity.

Happily for Enda Kenny, the economy is obligingly done a turnaround. That is the dilemma for so many like minded leaders. Can they survive the wrath of voters in times of scarcity, in order to give the economy enough time to turn around? The economic benefits of austerity take time to manifest themselves and it is often too lengthy for the patience of the electorate.

This was the case with Greece. When the election was held in January of 2015, the recession had already ended. The third quarter saw GDP (Gross Domestic Product) expansion of 1.4%. The country was finally witnessing growth for the first time in five years. The economy had finally turned the corner, but it was too late for the New Democracy Party.

Syriza Logo

Syriza Logo

The Greek electorate had tired of austerity. They wanted to believe the Syriza campaign promises, that they could escape the era of the troika. This was the three institutions that were helping Greece manage its debt. These were the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF).

SYRIZA party chairman and Prime Minister of Greece, Alexis Tsipras

SYRIZA party chairman and Prime Minister of Greece, Alexis Tsipras

European policy makers insisted that the new government honor the agreements reached with the previous government. The grandstanding and machinations played by the Greek government and its new Prime Minister Alex Tsipras, merely undid most of the goodwill and trust that had been built over the preceding years.

The impasse that continued over the next year between the Greek government and its creditors did convince investors, that Greece was not serious about further reforms. It also became increasingly doubtful, that Greece would be able to survive a debt to GDP ratio of 176.9%. This had repercussions throughout the larger economy and soon the country returned to negative growth.

Spanish voters faced a similar dilemma in December of 2015. The Conservative People’s Party (PP) under the leadership of Mariano Rajoy. had held power since 2011. Although he had won with a landslide in voting at that time, his popularity began to slide almost immediately.

Mariano Rajoy Prime Minister of Spain since 2011.

Mariano Rajoy
Prime Minister of Spain since 2011.

This was because the new Prime Minister was forced to abandon campaign promises, within ten days of his inauguration. Prime Minister Rajoy not only reversed a pledge to cut taxes, he actually raised them. He also cut spending by more than $10 billion USD (United States Dollar). Why? He discovered the public deficit was going to be 8% of GDP, rather than the projected 6%.

The actual deficit in 2012 would be 10.3%, which the Spanish government would reduce to 5.8% by 2014. Unemployment would peak at 27.16%, in early 2013. By late 2015, it had dropped to 21.18%. To be fair, some of this reduction is the result of a smaller workforce.

The debt to GDP ratio for Spain is now at 99.2%. By contrast it was only 35.5% in 2007. Growth has been steady, since the last negative quarter in the middle of 2013. The second quarter that year was at -0.3%. It has been increasingly positive since. A year later, the economy was expanding at +0.5%. By July 2015, the economy reached 1% growth and has since been enlarging by 0.8%. This includes the first quarter of 2016.

Although the Spanish elections held at the end of last year gave the ruling party the largest share of the votes, it was insufficient to form a new government. Since then, three attempts have been made to create a ruling coalition among the fractured political parties. They have all failed. New elections will now be held in June.

Debt of Ireland compared to Euro-zone average since 1999.

Debt of Ireland compared to Euro-zone average since 1999.

In the meantime, the caretaker government of Prime Minister Rajoy will continue. The situation is not ideal for new investment and will create more economic uncertainty. However, it is not yet clear if the divided electorate will change the results after six months of political instability.

The last general election in Ireland took place in 2011, during the Irish sovereign debt crisis. Unlike Greece and Spain, the situation there was not a consequence of overspending by the government. It had instead resulted from the national government guaranteeing six main Irish based banks, who had financed a property bubble.

Irish banks lost the equivalent of about $116 billion USD, with the housing collapse of 2007. The overall economy would come apart the following year. Unemployment would skyrocket from 4% to 14% by 2010. Meanwhile the national budget would go from a surplus in 2007, to a deficit of 32% of GDP by 2010. It would be the highest rate in the Euro-zone, despite the introduction of austerity measures.

The credit rating of Ireland would fall rapidly, as the banking losses mounted. The central bank could no longer cover the shortfall because the interest rate on Irish debt was becoming unmanageable. What followed was a bailout of 67.5 billion Euros (78.3 billion USD) at the end of 2010. In order to qualify for the assistance, the Irish government had to agree to reduce the budget deficit to below 3% by 2015.

Election posters in Cork South-Central Ireland.

Election posters in Cork South-Central Ireland.

By the summer of 2012, Ireland was able to return to the financial markets. At the end of 2013, after three years of being dependent on the European Union and the IMF the country was able to leave the bailout program. However, unemployment remained high and public sector wages were now 20% lower than before the crisis.

Government debt peaked at 123.7% of GDP in 2013, from 23.9% in 2007. By 2014, the rate had dropped to 107.5% and in 2015 would dip further to 93.8%.

Dublin City Center, capital of Ireland.

Dublin City Center, capital of Ireland.

Unemployment has now dropped to 8.6% , a seven year low. The economy has been in positive territory, since the beginning of 2014. In the last quarter of 2015, the rate of expansion was 2.7%. The rate for the entire year was 7.8%, the highest rate in the European Union as well as all developed economies. By comparison, the rate of growth for the entire Euro-zone was just 1.6%.

The economic turnaround in Ireland has arrived in time, to forestall another election that would have been held next month. The huge new investment coming from United States corporations attracted to the low Irish tax rate, has been a huge impetus towards growth. Rising exports to the United States and the United Kingdom along with a rebound in household spending, is responsible for the economic boom now taking place.

However, the gap between the expansion of the economy and the weak wage growth does explain why Fine Gael did so poorly in the February elections. The 28.2% increase in investment spending during 2015, has not yet translated to much higher living standards of the electorate. Although the public would like to enjoy the benefits of economic growth, there seems to now be a consensus that disciplined spending and lower taxation, the hallmarks of austerity will continue.

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