The Economist January 5th 2013 The Irish economy

Finance and economics

55

Fitter yet fragile

Denominator debate
Ire land,s debt as % of:

- GNP

-GNP/GDP hybrid*

-GOP
160

Ireland,s success in attracting foreign investment has its drawbacks 2012 was of calm IFreturned tothe year when a sensemarkets, euro-zone financial 2013 will be when Europe needs to show that its recipe of austerity and reforms can work. Strong evidence for that would be if a bailed-out country could finance itself again. Hence the hopes invested in Ireland, which entered its rescue programme in
2010 and is scheduled to make a full return

maceuticals, information technology and

financial services. The number of new fdi

projects in 2012 has been similar to that in 2011, itself the highest for a decade, says Barry O'Leary, the boss of Ireland,s inward-investment agency. The foreign presence is now a towering one, so much so that Irish exports actually
exceed the value of gdp. The contribution

i-u-1

2008

09

10

11

12t

13t

Sou rce: Irish Fiscal

* GN P+0.4(GD P-GN P)

Advisory Council

tEstfmate Forecast

to the bond markets at the end of 2013.

from net trade-exports less imports-has

more than offset falls in domestic demand,

The markets seem to be signalling it can be done. Yields on Irish government bonds maturing in 2020 fell from 8.5% at the start of 2012 to 4.5% by the end of the year. Renewed appetite for Irish debt allowed the government to regain partial access to
bond markets in 2012. Ireland,s debt-man -

which remains traumatised by excessive debt (households owe 209% of disposable income), continuing austerity and a financial squeeze as the now well-capitalised

Another concern is that Irish progress, both economic and fiscal, is typically measured using gdp, the output generated within Ireland. But for an economy where foreign firms are so dominant, gnp, or the income that goes to residents, is more relevant. Irish gnp is lower than gdp because

but unprofitable Irish banks limp along.

But this brightening picture is not all
that it appears. Take Ireland>s reliance on

of the big profits made by foreign firms. The gap between the two has been widening, fromi4% in 2007 to 20% in 2011,

agement agency plans to raise 10 billion ($13.2 billion) by issuing bonds in 2013. That
will leave it with 19 billion of cash re-

That widening shortfall reflects the fact

that the Irish people have fared much
worse than the Irish economy. National

serves, sufficient to cover the government

,

s needs for 2014.

There are stirrings of life in the battered Irish economy. Although gdp is thought by the imf to have grown by only 0.4% in
2012, that compares well with deep reces-

sions in Italy and Spain and followed a

1.4%

rise in 2011. The current account has

been in surplus since 2010, Underlying

foreign firms. That gears the Irish economy to global growth SO that it suffers when world trade falters, says Simon Hayes of Barclays. Exports have been growing at only 2% a year since last spring, the slowest since they started to recover in early 2010. It also makes the economy vulnerable to shocks affecting specific sectors. Ireland,s success in attracting global drugs firms-pharmaceuticals made up half of goods exports in 2on-means that it is be-

output measured by gdp was 7% smaller

in 2011 than in 2007, whereas national in-

come measured by gnp was 11% smaller. This matters not just for living standards
but also for Ireland,s fiscal situation: it is

gnp that does the heavy lifting on the pub-

lic finances, since multinational profits are

taxedso lightly.

If measuring Ireland,s debt as a share of

competitiveness has improved sharply,

judging by unit labour costs. Helped by a low corporate-tax rate of 12.5%, Ireland continues to attract foreign direct investment (fdi), especially from American firms and particularly in phar-

ing affected by the "patent cliff", the expiry

of patents on many blockbuster drugs. In 2on the value of Irish pharmaceutical exports rose by almost 7%, but in the first ten months of 2012 it fell by 3% compared with the same period a year earlier.

gdp understates the burden, measuring it

as a share of gnp overstates it because it

neglects the contribution that foreign firms

do make to taxes. The Irish Fiscal Advisory Council, a watchdog, has suggested a hybrid measure in which 40% of the excess of
gdp over gnp is added to gnp. This offers

a better gauge of fiscal sustainability for the Irish economy, says John McHale, who
chairs the council. On this basis, the debt

burden, which is expected to peak in 2013 at around 120% of gdf, would really be
close to 140% (see chart).

3 austerity
j5 AND COMMUNITIES!
Yes to more help from Europe

E TAXES!- STOP THE CUT!

Ireland's vulnerabilities explain why the imf wants Ireland's European creditors to give it more help. In particular it advocates lightening the debt-servicing charges on promissory notes, a sort of iou, which the Irish government issued in 2010 mainly to prop up the collapsed Anglo Irish Bank. It also wants the European Stability Mechanism, a euro-zone rescue fund, to relieve Ireland's public-debt burden by taking an equity stake in banks which have had state help. A lot has gone right for Ireland (which has just begun its
six-month stint in the eu s rotating presi'

dency). But it wouldn't take much for the euro zone s model pupil to fail to graduate
'

from its rescue programme.