Austerity discredited: Ireland goes into reverse

Praised across the world for its model recovery, Dublin finds the pace of cuts too much to bear

Ireland, the poster child of the eurozone's austerity drive, saw its economy shrink in the third quarter, according to the latest national accounts from Dublin.

Irish GDP contracted by 1.9 per cent, on an annualised basis, in the three months to September, throwing an impressive run of two consecutive quarters of growth in the first half of 2011 into a sharp reverse.

The Dublin government's achievement in generating growth despite severe public spending cuts had been hailed by some economists as an example of a successful "expansionary fiscal contraction". And Ireland, which was forced to seek a bailout from the International Monetary Fund and the European Union in November 2010 after investors fled the country's sovereign bonds, had been held up by European policymakers as an example for other distressed eurozone nations such as Greece and Portugal to follow.

But the latest figures show that the country was the worst-performing economy apart from Greece in the eurozone in the third quarter. The 1.9 per cent GDP fall over the three months to September was almost four times higher than the 0.5 per cent than economists had expected. Ireland's export boom continued, with sales abroad up 21.8 per cent compared with the same period in 2010. But that boost to growth was swamped by declining domestic demand as the economy continued to shrink under the pressure of government spending cuts and tax rises. Investment was down 20.9 per cent on the year before.

With growth slowing in two of Ireland's major exports markets– the UK and the eurozone – the country's ability to export its way back to economic health looks increasingly uncertain. Ireland's trade surplus came in at €850m, down from €1.8bn in the same period last year.

"Ireland is very dependent on the performance of its trading partners to have any positive GDP figure," said Michael Collins of Dublin's Economic Research Unit. "That's a very dangerous basket to have all your eggs in."

The governing Fine Gael/Labour coalition in Dublin has continued the severe austerity drive of its Fianna Fail-led predecessor, unveiling €3.8bn in additional spending cuts and tax rises this month.

Before that budget, the Irish prime minister, Enda Kenny, insisted that Ireland is on a "four-year path to recovery". A return to recession in Ireland, or even a prolonged period of low growth, would raise doubts about the sustainability of Dublin's public borrowing pile, which is projected to hit 120 per cent of GDP in 2013.

Ireland has repeatedly been praised by European leaders and policymakers for its austerity measures. In September, the former president of the European Central Bank, Jean-Claude Trichet, said: "When I look at Ireland, I see a country which is gaining credibility regularly. We can do nothing but encourage Ireland in this path."

Last month, the German Chancellor, Angela Merkel, praised Ireland as an "outstanding example" of a country that received a bailout and has fulfilled the terms of its bailout.