OPINION:It is nonsense to write off the Irish economy. Its skill set and culture of enterprise will win out
AS A dual citizen of both Ireland and America, and as someone who spends half his life doing business in Europe and the other half in America, I find it odd that so many Americans lump all European countries together.
To judge by official pronouncements and the attitude of Europe’s finance ministers, Ireland, Spain, Portugal and perhaps Italy all suffer from the same unmanageable debt problems plaguing Greece. The recent decision by Moody’s, the American ratings agency, to downgrade Irish bonds to junk status seemed to confirm, at least in the press, that Ireland was not far behind Greece.
Both Greece and Ireland have extraordinary debt burdens that will not simply go away on their own. This much is undeniable. But when one thinks about the ability of each country to drive economic growth in the future, one sees a study in contrasts.
The Greek situation is rooted in fiscal mismanagement, a rapidly ageing population and a business environment that has never shown much enthusiasm for entrepreneurial activity, capitalism or tax collection. It is the polar opposite of Ireland.
It seems inevitable that the short-term austerity plan just agreed to by the Greek government in exchange for a partial bailout is, at best, another way of kicking the can down the road. There really isn’t a clear Greek recovery plan.
For its part, Ireland’s banking system clearly requires restructuring. Public confidence is low and the willingness to invest in the future is small.
But unlike Greece, Ireland faces what is akin to a balance-sheet issue. In Wall Street terms, Ireland has what might be called “a good business, with a bad balance sheet”. The fundamentals remain strong – something the EU persists in overlooking. Indeed, other than debt, the similarities between the two countries stop.
Even with its problems, Ireland remains one of the wealthiest countries in the EU. Ireland’s gross domestic product (GDP) per capita (with purchasing power parity) in 2011 is forecast to be €27,500, compared to GDP per capita of €19,700 in Greece. GDP per capita in Ireland in 2011 is forecast to remain above the euro-area-16 average of €25,400.
Moreover, Ireland’s public debt might become manageable if a growth economy can return. Today, public debt is equivalent to 96 per cent of Ireland’s GDP. Significant, yes, but nowhere close to the Greek debt that is over 140 per cent of its GDP.
Can Ireland return to the days of the Celtic Tiger? The most promising part of the Irish economy is its workforce. In 2008, 45 per cent of 25-34 year olds in Ireland had attained a third-level education. In Greece, it was only 28 per cent. Little wonder that Ireland ranked fourth out of 58 countries in terms of availability of skilled labour. Greece ranked 32nd.
But perhaps the single most important difference is the market-oriented, entrepreneurial and trading culture that has long characterised Ireland.
At 4.3 per cent, entrepreneurs starting businesses as percentage of the population is significantly higher than the average among OECD countries, which is 3 per cent. In the US, it is 2.9 per cent and in the EU 2.7 per cent. The rate of established entrepreneurs at 9 per cent is one of the highest among developed nations.
This ecosystem is being supported by significant Government commitment to venture capital through the €500 million Innovation Fund Ireland and a comprehensive national innovation strategy. Each year, the World Bank compiles a report on the ease of doing business. In 2011, Ireland ranked ninth out of 183 economies; Greece is ranked 109th. The World Bank estimates there are four procedures needed in Ireland to start a new business. In Greece, there are at least 19.
Yet it is precisely these characteristics the European Central Bank is threatening by demanding, for example, the country raises its relatively low corporation tax. Europe’s banking crisis was not caused by Ireland’s low corporation tax rate, nor will it be solved by raising it. What, then, can be done to restart Ireland’s economy and tap its entrepreneurial tradition?
One has to deal with recapitalising the banks. One possible solution is exchanging debt for equity. This is effectively how the US solved the savings and loans crisis of the 1980s. The solution in the US was based on the fundamental premise you don’t make a bad balance sheet stronger with more debt – you make it stronger with less debt.
The same solution would do more than improve the solvency of Ireland’s banking sector. It would give Ireland the chance to revive its history of vibrant capitalism and entrepreneurship.
Ireland has long attracted business and trade with the world. It is one of the most open economies in the world and corporate America has invested more in Ireland than it has in China, India, Russian and Brazil combined.
Ireland needs to stick to this model if it is to return to the growth patterns of the past.
David McCourt is chairman and chief executive of Granahan McCourt Capital of Princeton, New Jersey. He is the University of Southern California’s Annenberg inaugural economist in residence and is on the North American advisory board of UCD’s Smurfit Graduate Business School