IF CYPRUS is going to get out of the current economic crisis then it needs to be honest about the scale of the problem and simply “get on with it”, said Irish minister Lucinda Creighton whose country has received an €85 billion bailout.
The Irish Minister of State for European Affairs was in Cyprus this week to attend the informal ministers meeting on the EU’s long-term budget.
The Sunday Mail caught up with the young, straight-talking and on-the-ball Creighton in between negotiations and lunch to hear her views on how Ireland went from poverty to boom to bust (and bailout), and now slowly back to self-sufficiency.
Asked what caused the crisis in Ireland, she said: “In a nutshell, the property bubble fuelled by an unregulated, irresponsible banking sector. Obviously government policy contributed to that but the nub of the issue is we had an enormous property crash which brought the whole economy crashing down with it.”
Between 1995 and 2007, Ireland experienced extraordinary economic growth, making the ‘Celtic Tiger’ the poster child of the EU. In the summer of 2008, it officially entered into recession. In 2010, Ireland received €85 billion in the form of a bailout loan from the troika (European Central Bank, International Monetary Fund and European Commission) and through bilateral loans from Britain, Sweden and Denmark.
Two years later, unemployment is near 15 per cent but the economic indicators are starting to look positive. More importantly, Ireland has slowly regained the trust of the world and markets, even raising cash in July by tapping into short-term bond options. The aim is to get out of the bailout mechanism within 2013.
“The economy is basically growing once again. We’ve effectively emerged from recession. The economy grew by over 1.0 per cent last year, so by and large it’s a good news story, though that’s not in any way to take away from the huge sacrifices that the Irish people have had to make,” said Creighton.
The Irish experience has plenty that Cyprus can learn from. Both countries are islands with relatively small populations. Both have a historic enmity towards former colonial master Britain, though the British bailout loan to Ireland and Queen Elizabeth’s first-ever visit to the Irish Republic last year did much to bury that hostility.
Both experienced a period of enviable economic growth fuelled mainly by a property bubble followed by recession and soaring unemployment. Both applied for a bailout when the money dried up after international markets closed the tap on reasonable lending rates.
The similarities end there.
Once coming to terms with the crisis, Ireland took swift and hard measures to beat it, resulting in today’s more positive outlook. “It took a bit of time for the government to really come to terms with the scale of the crisis,” said Creighton.
“The first budget of 2009 ignored the crisis and ignored the need for fiscal consolidation but as the year progressed it became apparent there was a huge gaping hole in the public finances and so there was an emergency budget later in 2009. So, we’ve had three and a half years now of consolidation,” said the minister, predicting another three years of belt-tightening.
Ireland implemented a whole range of measures to curb the “huge amount of excessive spending in the public sector”.
“Our civil service grew at a rate of knots during the Celtic Tiger period. The government kept spending and spending, increasing bureaucracy, increasing quangos (quasi-autonomous non-governmental organisation). So, a lot of that was very easy to cut to be honest, because there was a lot of low-hanging fruit, a lot of fat in the system that needed to be trimmed,” she said.
The Irish minister said public sector salaries were a starting point for the fruit-cutters, noting that reductions in spending were implemented right across all public services.
“Nothing was excluded really apart perhaps from our social welfare payments which by and large still have been protected.”
Public servants salaries saw an average cut of 14 per cent while a voluntary redundancy scheme introduced last year has made way for 26,000 job cuts.
“So far, we’ve had no forced redundancies in the public sector and hopefully that will be maintained,” she said.
The push for major reforms and efficiencies in the public sector (belt-tightening, early retirements, salary cuts) was decided in an agreement between the government and social partners in 2010.
That deal has been honoured in full by the government but will be up for review in 2013, noted Creighton.
“That’s how the measures began really, but as you move from one budget to another the decisions get tougher, as there’s less and less of the easy options in terms of cuts to be made,” she said.
According to Creighton, lower and middle-income workers have been hit the hardest by the crisis.
“They’re the people who have really paid the price of the crisis. In the private sector particularly, they lost their jobs. Huge numbers of people lost their main source of income, or if they didn’t lose their jobs, they took significant pay cuts, up to 35-40 per cent in certain sectors.
“Of course that then has a major impact on mortgage repayments. We have a major problem now with mortgage arrears in Ireland where families just can’t meet their mortgage payments. That’s one of the biggest challenges facing the government.”
Acknowledging that Ireland is still living in very difficult circumstances, Creighton argued that the measures have clearly paid off, providing more rationality to spending while restoring Ireland’s credibility.
“We were living beyond our means. Towards the end of the Celtic Tiger era, one in every four euros received by the exchequer was coming from the property sector so it was a complete fantasy.
When that collapsed, we found that in effect we were spending far more than we could afford. So, we’ve had to cut our cloth, and I think that that has been very effective, and worked very well,” she said, adding that in general the Irish public has supported the government’s measures.
“The other thing is that the measures have very much restored Ireland’s credibility on the international stage. Nobody’s questioning whether Ireland’s going to meet its targets under the troika programme or whether Ireland is a safe place to invest.
“We’ve stabilised our banking sector and economy. We’re not haemorrhaging jobs any longer. Our unemployment rate is still unacceptably high but the attrition rate has really stopped,” she said.
At the same time though, aren’t the future generations laden with an insurmountable public debt?
“Absolutely, the debt levels are unacceptable. It’s very difficult for a country to grow when it’s saddled with debt in excess of 120 per cent of GDP. That’s why we’re negotiating at an EU level to sever the link between sovereign debt and banking debt… That’s our goal. And for Ireland to really rebound, that’s going to be hugely important.”
Creighton’s account of Ireland’s response to the troika’s arrival differs sharply with Cyprus’ own experience of the trio of international money lenders, due back on the island this month for further negotiations.
“Initially, when the troika arrived in Ireland we had been in a very tragic political meltdown for about 18 months. We had a government that had lost all authority, all confidence, and so when the troika arrived in Dublin, it was almost like a sense of relief amongst the public. And people were delighted that someone was coming to try to sort out the mess that we were in,” she said.
“Of course that very quickly turned into resentment and so on. Still in Ireland, by and large, the troika are not popular, but they are not despised. People understand we need the money and we need the cooperation to get out of the mess we’re in.”
Perhaps music to some ears in Cyprus, the European affairs minister said Ireland found the troika to be “extremely flexible and extremely willing to assist countries”.
She explained of the bailout mechanism: “It’s not a punishment process, it’s trying to make sure that countries like Ireland and Cyprus can grow their economies, be competitive and emerge from recession.”
Creighton pointed to the fact that Ireland successfully defended its position on its low corporate tax rate, insisting it was a fundamental part of Ireland’s investment strategy, industrial policy and export strategy. “And we have been proven right because Ireland has emerged from recession,” she said.
It couldn’t have happened at a better time.
The positive indicators come at a time when the public is starting to get weary of cutbacks and fiscal consolidation.
“Understandably, people want to see light at the end of the tunnel,” said the minister, pointing to Ireland’s recent successful bond options.
“So we are on the path to emerging from our bailout programme, to being able to borrow from the markets again, to fund ourselves and stand on our own two feet in an economic sense. I think that’s very important for the Irish people.”
Asked why Ireland did not see the kind of social unrest witnessed on the streets of Athens, Creighton said there was “real political consensus across the board” for fiscal consolidation.
In terms of the public’s response, she referred to an Irish sense of realism and pragmatism.
“People knew, and we all felt that what was happening in Ireland was not sustainable, that the last few years of the Celtic Tiger was a little bit of a surreal experience. There was a bit of a coming back down to earth.
“So people just said OK, let’s get on with it. Let’s pick ourselves up, let’s move forward. We’ve been through worse times. Ireland after we gained independence was a destitute, impoverished place, the poorest country in Europe. We’ve been there before. This is nothing like that. We can just move forward. And we have support from our European institutions, support from our European partners, we just need to get on with it.”
What can Cyprus learn from Ireland?
“To get on with it, to be resolute and to be honest about the scale of the crisis.”
Creighton said Ireland made the mistake of not insisting on full transparency from the banks and learning the full scale of the banking crisis from the start.
Instead of dealing with the problem in the first round, the banks ended up needing a number of bailouts.
“I think that’s a very important lesson: that every other country, Spain, Cyprus, should try to avoid the mistake we made,” she said.
