The interest rate cut by the European Central Bank last week – its fourth cut since June – is, at face value, part of the economic cycle and a retreat from sharp increases which followed vertiginous inflation.
A rate cut is good news for the estimated 127,000 Irish people with tracker mortgages, and potentially, in future, the 700,000 other fixed and variable rate mortgage holders. Further rate cuts are planned for 2025, which will be bad news for savers.
This rate cut and those expected next year are also a response to significant challenges facing the largest economies in the European Union.
Weak economic performance coupled with political instability in France and Germany has created uncertainty and concern as the siphon of Covid spending is turned off. Michel Barnier’s short-lived premiership collapsed in France last week as he tried to rein in spending.
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The German economy faces recession amid ongoing political instability. Far-right parties are making gains across many member states.
The big picture is Europe is struggling. The US and China are now more competitive and Europe’s long-term global economic relevance is uncertain.
Some of these challenges will be exacerbated by the second Trump presidency. He is likely to demand that the EU spend more in its defence, he has pledged to roll back climate laws - which may make EU companies less competitive- there is the threat of a US-driven trade war and tax or tariff changes which may impact multinationals based here. Ireland is uniquely exposed to the consequences of Trump’s policy changes.
And there is a hangover. During the two-year eurozone financial crisis the bloc largely split with rich, northern EU states blaming spendthrift, indebted southern states (and Ireland) for their feckless ways. These faultlines remain and make responses to challenges facing Europe harder to co-ordinate.
Ireland has micro-level versions of Europe’s challenges. Ireland’s infrastructure is creaking, planning and delivery of State projects is too slow and mutterings from industry about the impacts of these limitations on its competitiveness are becoming louder.
Where Ireland differs is with regards to its bounteous exchequer revenues. Ireland is alone in Europe in having elections where the main subject of debate is how to disperse unprecedented revenues. These revenues have insulated Ireland from the pressures facing our European neighbours.
It is also the case that – yet again – the needs of the Irish economy, pump-primed by massive corporation taxes from US multinationals, are in stark contrast to the needs of the EU’s largest, but struggling, economies.
Soaring inflation in rents and house prices is one of the chief drivers of cost of living pressures in Ireland.
In a week when the ESRI confirmed that Irish house prices are overvalued by 10 per cent – increasing the risks of a sharp market correction – what the Irish economy ideally needs is a period of higher, not lower, interest rates to cool house price inflation.
As the ESRI warned ominously, “the larger the degree of overvaluation the greater the risk of significant correction”.
Five key reads
- Finn McRedmond shares her view on Paul Mescal’s recent appearance on Saturday Night Live, writing that the show’s inherent laziness went too far by scripting anti-British jibes for the Irish actor to roll out: “Are we really still this repetitive Brit-bashing tedium? Could we not retire it as the final victim of 2024?”
- Was Michael O’Leary right about teachers after all?: The Secret Teacher gives their take on why teachers are demoralised in their job, and says the “Department of Education or school managers seem to be encouraging practices that treat the student like a raw product and the school as a business.” The writer recalls the Ryanair chief executive’s remarks in November, when he said he would not hire educators to “go out and get things done”.
- “You’ll think you’ve wasted your life. You haven’t”: What advice would you give your younger self? This weekend’s magazine cover story features advice for all ages from people aged from their 20s to their 90s, including Siobhán McSweeney, John Boyne, Tony Cantwell and Ann Ingle.
- While Fianna Fáil and Fine Gael have ruled out negotiating with Sinn Féin when it comes to building the next Government, they are – as Justine McCarthy writes – “playing government-formation footsie” with Michael Lowry. “If you want to identify what caused the low election turnout look no further than this dance of the seven veils with a man whom both parties have previously adjudged unfit even to be in the same room as them.”
- Corinna Hardgrave’s latest restaurant review sees her dine in Temple Bar. The Seafood Café earns 3.5 stars from our food critic, who brands the experience a “delightful way” to spend a Sunday afternoon: “There’s something gloriously audacious about turning the classic Sunday lunch on its head and offering a seafood feast instead of roast beef and Yorkshire pudding, which is exactly what Niall Sabongi, the operator behind The Seafood Café, has done.”
In this week’s On the Money newsletter, Joanne Hunt looks at what teachers want for Christmas: “Turns out it’s not a Best Teacher mug, a Múinteoir bracelet or a Christmas tree decoration to remind them of their term-time charges.” Sign up here to receive the newsletter straight to your inbox every Friday.
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