Ireland's bust was spectacular.
When Dublin applied for an international bailout last November the nation's fiscal fundamentals were among the worst in the world. The government's deficit was 32 per cent of GDP, thanks mainly to the cost of bailing out Ireland's ruined banking sector. The country's stock of debt was closing in on 100 per cent of national output. The markets were charging the Irish government double-digit interest rates to borrow.
But, since then, the country has experienced two successive quarters of decent growth (unlike Greece and Portugal, which are still shrinking). Ireland's deficit has dropped to 10 per cent. The yields on Irish bonds have also fallen to 8 per cent, indicating that investors are more confident that the country will be able to pay off its debts.
It looks like a miracle. But is the Celtic Tiger really beginning to roar again? An OECD report on the country yesterday was generally optimistic. The Paris-based organisation raised its forecast for GDP growth to 1.2 per cent for this year, up from zero in its May projection. It even suggested that Dublin ought to reduce its deficit more quickly than agreed under the EU/IMF bailout.
Yet there are perils ahead. Ireland's growth this year has been export driven. That makes it vulnerable to a eurozone slowdown. There is another obstacle. The United Kingdom, Ireland's largest trading partner, is also trying to grow through increasing exports. Office for National Statistics trade figures this week showed that Britain increased exports to Ireland in August by £213m and cut imports by £153m. This illustrates the problems of many nations trying to increase their exports all at once. It also illustrates the disadvantage of Ireland, locked in the eurozone, in not being able to devalue its currency. Britain is exporting more to Ireland, in part, because of the 20 per cent depreciation of sterling.
Despite the OECD's confidence about Ireland's prospects, the organisation more than halved its 2012 growth forecast for the country to 1 per cent, down from 2.3 per cent in May. Ireland's deficit reduction plans are fragile too. The OECD says Ireland is on target, but not everyone agrees. Dublin's new official fiscal council said this week that Ireland will miss its 2012 budget deficit target of 8.6 per cent of GDP unless it imposes an extra €400m (£349m) of cutbacks in the December budget.
The overall debt dynamics are less than rosy too. The OECD puts Ireland's debt stock as a proportion of GDP on course to rise to 117 per cent in 2013. That is dangerously high. To bring this debt burden down, Ireland needs trend growth of 2.8 per cent a year from 2013. If growth falls short of that, the total debt pile would continue to rise and would soon become unsustainable. While Irish bonds are considered less risky than those of Greece and Portugal, credit default swap rates show that the markets still consider the country to have a default probability of around 9 per cent.
Ireland has advantages that Greece and Portugal lack, such as a flexible labour market, a more export-oriented economy and a population prepared to accept considerable public-sector austerity. And Ireland does seem to be battling its way back to competitiveness. Hans-Werner Sinn, professor of economics at Munich university, points out that Ireland has managed a 12 per cent real depreciation in labour costs since the crisis struck. By contrast Spain and Greece have achieved a zero per cent depreciation, while Portugal has eked out just 1 per cent.
But the OECD forecasts that unemployment will remain at 14 per cent well into 2013. Joblessness on that high level could begin to strain even Ireland's impressive discipline in the face of public austerity. Ireland's politicians have held the line so far. But that might not last forever. The Energy Minister, Pat Rabbitte, yesterday spoke out against the idea that the government should go faster on spending cuts .
Ireland's fate remains unclear. The country might be able to make it make it through this storm without needing to default. But that depends hugely on decisions made by the leaders of the eurozone. A false move could tip the Continent into another financial meltdown, or a new recession, destroying Ireland's export-driven recovery.
The consequences of an Irish default would be felt here in Britain. The Royal Bank of Scotland and Barclays have a combined exposure to the Irish economy of €68bn. If Ireland crashed out of the single currency, these two banks would suffer huge losses and taxpayers would have to bail them out. That is why it is not just the Irish who are praying that what we are seeing from the Celtic Tiger is not a dead cat bounce.