Worlds apart

The people of Ireland are feeling the pain of austerity, but Britain could learn a lot from its neighbour's economic policy, says Aidan Neill

Two weeks ago Ireland's National Treasury Management Agency (NTMA) announced the rarest kind of accounting mistake. As a consequence of some double counting of liabilities within the Housing Finance Agency, the Irish government established that it was €3.6 billion (£3.1 billion) better off than it previously thought. Subsequently, Ireland's gross outstanding debt for 2010 was revised to €144.4 billion (92.6 per cent of GDP) rather than the previously published €148 billion (94.9 per cent of GDP).

Little by little, Ireland is edging in the right direction. As a recent Goldman Sachs piece pointed out, the main threats to Ireland's economic health are now external, not domestic. Four positive developments have contributed to this improvement. First, Ireland's economic data has been better than expected - growth in real GDP (gross domestic product - the value of all goods and services produced in a year, adjusted for inflation) is running at 7 per cent annualised, driven by strong export growth. Second, the new-ish Fine Gael/ Labour government, elected in February and led by Enda Kenny, is pushing through the previous government's austerity plans (yet maintaining popularity, perhaps more remarkably). Third, the attitude of the European authorities towards Ireland has changed since the European crisis intensified in July: Ireland is now presented as an example of where austerity measures have been successfully implemented. Fourth, and perhaps related to the success of the austerity measures, Ireland has received a significant reduction in the interest rate it pays on the bailout funds it received, which will reduce the bill on government debt by 0.7 per cent of GDP from next year.

False economy

As an Irishman living in London, I have good reason to be interested in the economic paths of both Ireland and the UK. While Ireland, as a small country on the geographical edge of Europe, has tied its economic future to the European mast, the UK has played a cautious "wait and see" policy, choosing to stay out of the euro and to retain control over its monetary policy. With the Greek economy in crisis and as speculation about the futures of Italy and Spain mounts, policy-makers in the UK are becoming prouder of their Euroscepticism by the day.

Their rhetoric is understandable. Control over monetary policy has allowed the UK to maintain record low interest rates, to pursue quantitative easing, and to be regarded as a relative safe haven in global government debt markets, keeping the UK's borrowing costs to a minimum. The UK is currently able to borrow for ten years at an average interest rate that is little more than 2 per cent, while Italy has breached the critical 7 per cent level in recent days, a threshold which has historically led to an EU bailout being mooted.

Perhaps, however, the UK's sense of security is somewhat illusory. While there is much talk of austerity and cuts, the reality is that between 2000-2010 had the UK government's annual expenditure kept pace with inflation, the budget would have risen from £343 billion to around £450 billion. Yet Alistair Darling spent £669 billion in 2009-10 and George Osborne will have spent £692 billion in 2010-11. The cuts are more like scratches than genuine flesh wounds.

Instead of being forced to address an inflated public sector, decreasing international competitiveness, and an over-reliance on financial services, the British government has been able to hide behind tools like low interest rates, quantitative easing and inflation.

Something has to give

Jin Liqun, the head of China's $400 billion sovereign wealth fund recently accused Europe of "indolence" and "sloth". Specifically he said: "If you look at the troubles which happened in European countries, this is purely because of accumulated troubles of the worn out welfare society." That's a very generic analysis of Europe as a whole, and each country is different. What's clear, however, is that as the massive populations of India and China grow, and their skilled middle-classes develop, workers in high-cost, high-margin countries like Ireland or the UK will be under increasing pressure to prove their worth.

Failure to compete in this skills race will either lead to further outsourcing, or to investment in IT. Recently the CIO of US asset management firm BlackRock, Rick Rieder, calculated the number of productive hours saved by software implementation nationwide over the past decade. It added up to the equivalent of 44 million jobs. "We have 148 million jobs in the country. Take 44 million jobs away from 148 million jobs and you can't fix that. I think it's a really big deal."

Perhaps we will see a new period of Luddism the US and the UK, with would-be workers smashing the production lines of Apple Inc. More likely is that labour is either going to have to become more flexible (accepting less remuneration or moving location), or more skilled. Something has to give.

Ireland has a highly adaptable workforce with a strong skills base, which helps it to compete on a global scale in specific industries. Almost 1,000 companies,including the likes of Google, eBay, Intel and Facebook, have chosen Ireland as the hub of their European networks. Eight of the top ten global medical technology companies have a manufacturing base in Ireland. Companies investing in Ireland for the first time rose by 20 per cent in 2010 and included the likes of Telefonica, Warner Chilcott, and LinkedIn.

This kind of competitiveness is underpinning Ireland's return to export-led growth - consumer prices have fallen, while those in the UK have remained on an upward path. Wages and other costs have adapted to the change in labour market conditions, with public sector wages having been reduced by an average of nearly 15 per cent.

Cuts in Ireland have been, and will continue to be, biting, but there's a growing sense that there's a route out of the mess. This route will be a real route, based around becoming more competitive in the skills race and not an artificial one like Britain's, which sustains a self-indulgent status quo.