70-A2_Macro_Irish_Crisis - The Irish Financial Crisis...

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General Economic Background on Ireland A summary of the current macroeconomic situation in Ireland: GDP growth: -4.1% in year to end of Q2, 2010. GNP (gross national product) is nearly twenty per cent lower than at the peak of the Irish economic cycle Inflation : +0.7% annual rate - but economy is close to experiencing persistent deflation Unemployment has doubled to over 290,000 in the last two years - now more than 12% of the labour force and a growing long-term unemployment problem Construction has suffered greatly during the downturn - because of the boom it grew to account for 12% of GDP (by value added) before the recession but many thousands of jobs have been lost and new housebuilding has collapsed. Capital investment spending is down 22% on the last year Combined value of government guaranteed bank and public sector debt is estimated at Euro 130billion - more than 230% of Irish GDP Ireland is running a huge budget deficit . And it appears that - after the bail-outs - annual interest payments on sovereign debt will be 20% of total tax revenues by 2014. For many years Ireland has had a low rate of corporation tax of 12.5% - a supply side policy designed to attract inward investment. There has been some pressure from Germany and other EU countries for Ireland to raise corporation tax as part of the ‘price’ of a bail-out. Ireland joined the single currency when it was established in 1999. Because Ireland is a member of the Euro Zone it’s monetary policy is tied to decisions made by the European Central Bank. It cannot unilaterally cut interest rates or attempt to devalue their exchange rate in a bid to become more competitive. In the absence of currency flexibility Ireland can restore competitiveness only by cutting costs and wages (causing a real fall in living standards) - this has already happened but social unrest is being created by the need for further cutbacks in Irish government spending and a steep increase in the tax burden (including rising VAT and pension cuts) Trade unions opposed to the fiscal austerity programme introduced by Ireland argue that the European banks and American hedge funds should bear some responsibility for causing the
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financial crisis by agreeing to take a “hair-cut” in other words, they accept a reduction in the amount of debt they expect to be repaid over time. Ireland’s main banks are Bank of Ireland Allied Irish Bank Anglo Irish (already nationalised earlier this year) Source: Irish Statistics Office An unsustainable boom turns sour Ireland is a small European country whose GDP is less than 2 per cent of total Euro Zone national output. The economy grew spectacularly quickly from the mid 1980s onwards and became known as the Celtic Tiger economy . As a result Ireland’s relative GDP per capita (PPP adjusted) surged from bottom of the EU league table to second top (behind Luxembourg) by the mid point of this decade. But much of the extra wealth and funds flowing in their banking system was diverted into an
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This note was uploaded on 02/08/2012 for the course ECO 51844 taught by Professor Sabet during the Spring '11 term at FIU.

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70-A2_Macro_Irish_Crisis - The Irish Financial Crisis...

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