Cliff Taylor: A tale of two economies – could Greece learn from Ireland?

Here is a tale of two economies: Ireland and Greece. One can raise money at interest not far above 1.5 per cent from borrowers; the other remains locked out of the markets. One has a found a way out of austerity; the other is still stuck with it, and is this weekend facing great uncertainty.

Perhaps we should not be too self-congratulatory about this, given the tightrope that Ireland walked. Brian Lenihan said in December 2009 that Ireland had "turned the corner", but in fact it was well into 2012 before the corner even came into view. In between came the bailout and the dark days that followed, when no one was sure where it would end.

There will long be debate about why Ireland succeeded where Greece failed. The underlying strength of parts of our economy have obviously been central, and we carried through the bailout programme. But first look at the obvious: where it started.

Ireland entered the crisis with a low national debt. Greece’s debt was already at danger levels, of 100 per cent of GDP, before trouble hit in 2008. In the same way that Ireland’s banks gorged themselves on low-priced and freely available international funds after we joined the euro, the availability of cash allowed Greek governments to keep borrowing, even though debt was already high.

Austerity programmes

Both Ireland and Greece went through severe austerity programmes: Greece did as much as, or even a bit more than, we did in terms of cutting borrowing, depending on exactly how you measure it. Greece, at least before the latest upheavals, was only borrowing to repay its debts, as revenues already covered the cost of running the country, a huge improvement from when the crisis started.

The problem is that Greece never got momentum moving firmly in the right direction; it never got around the corner. As the crisis took hold, its debt level shot up, reaching more than 170 per cent of GDP. Reducing such a high debt level requires high growth (along with a bit of inflation) and a big surplus on the government’s annual budget, excluding debt costs. Pinned back by recession, Greece has been running hard to stand still.

Its debt level dipped temporarily after creditors were forced to take a write-off in 2012, but soon resumed its upward march. Tantalisingly, last year, its long-term bond interest rates fell to 6 per cent, and there were some signs of growth. How unwise then for the EU and IMF to pick a fight last year over the Samaras government’s 2015 budget plans. And how damaging for the new government to allow delay and indecision to continue for six months, destroying confidence again, undermining Greece’s banking system and getting itself backed into a terrible corner.

Momentum

Ireland also struggled to get the momentum going in a positive direction after crisis hit, even after the bailout money arrived in 2010. It is partly a question of maths – it is just very difficult to cut your way out of a debt crisis. And it is also a question of confidence. Ireland stuck at it, in terms of budget adjustment, and started to benefit from some growth pick-up until, finally, confidence and international capital returned.

We broke the vicious circle and were then able to take advantage of a period when international investors were scouring the world for places to get some kind of return on their money. Greece never managed it , despite the signs in late 2014 that had raised some hope. Perhaps , given how deep a hole it was in, it never could have, at least not without a bigger and earlier write-down of its debts.

Were there other factors? The underlying strength and productivity of our economy was also a key factor when compared with that of Greece. Taoiseach Enda Kenny has argued that we also adopted a more growth-friendly approach. It is true that our overall adjustment was a bit more based on spending cuts and a bit less on tax hikes than the Greek programme – though we have had plenty of tax hikes here too – and also that the current Fine Gael/ Labour Government tried to limit tax hikes in its early years and made some income-tax cuts more recently. But let's be clear. Austerity will always, by definition, cost jobs and growth. You do it because you have to. What you hope is that doing it can, eventually, restore confidence and lead to a pick-up in growth, as we are now seeing.

Confidence

Greece’s new government misjudged the hit confidence would take as it dragged out the talking. Perhaps there are lessons in the Irish experience in terms of delivering on promises and gradually building confidence. But Greece’s debt pile is still too high, and will never all be repaid. That

Europe

and the IMF continue to pretend otherwise is crazy.

But this weekend there are more pressing concerns, as the Greek banking system is on the brink of collapse and the country is about to default. Against this background, Greece’s creditors’ insistence on discussing structural reforms and picking at the details of more austerity is as bizarre as the Greek government’s tactics and the risks it appears willing to take.

First stop the crisis and save the banks. Because the costs of not doing that to both sides will be enormous.