Irish strive to keep Celtic 'Tiger' feisty

The victors in Thursday's election will face formidable challenges as Ireland's economy begins to slow.

The campaign posters that hang from lampposts around Ireland are full of numbers. They promise 2,000 more public hospital beds, 2,800 more police on the streets, or 4,000 new primary-school teachers, attempting to woo voters in Thursday's election.

The result is predicted to be the closest in years, with Taoiseach [Prime Minister] Bertie Ahern's Fianna Fáil party and the opposition party Fine Gael likely to be the largest two groups elected to a coalition government. But when the votes are finally counted, those election promises will have to rely on more important numbers: the country's balance sheet.

For years, Ireland's "Celtic Tiger" has been hailed as a fiscal miracle that brought the once-impoverished country to the top rungs of Europe's economy. Whereas it once struggled to be self-sufficient – losing many Irish to emigration – today Ireland is a top destination for immigrants eager to fuel its engines with low-wage labor.

But with the economy slowing down and Ireland's competitiveness slipping, the winners of this week's election will face difficult decisions in the next five years. In March, a report by the Economic and Social Research Institute (ESRI) predicted that economic growth next year would fall to its lowest rate since 1993 and linked this to a deflating construction sector.

"The slowdown in construction will be the biggest challenge the Celtic Tiger has faced," says Ronan Lyons of the National Competitiveness Council (NCC), an independent body that advises the Taoiseach (pronounced TEE-shock). "It faced a test [after 9/11] but bounced back quite well, mainly due to domestic housing construction." Some say this has led to over-reliance on this sector: a Central Bank estimate shows spending of €37 billion ($50 billion) – a quarter of Ireland's gross national product – on building and construction in 2006.

Another linchpin Ireland had relied on – competitiveness fueled in part by relatively low wages – has also been weakened, threatening foreign direct investment.

"Rising costs are the single worsening problem," says Mr. Lyons. "The weakening dollar between 2000 and 2003 hit Ireland more than anywhere else in Europe. Combined with that, you had long-running economic growth feeding wage expectations, leading to a situation where Ireland has an inflation rate that is about twice the European Union average."

Last year, hourly earnings in Ireland grew by 5.3 percent, compared with 2.6 percent in the eurozone – putting Ireland at a competitive disadvantage not only to India and China's emerging economies, but EU countries as well. Irish prices have also gone up, fueled by a rising demand in areas like housing, commercial rents, and infrastructure.

Politicians propose solutions

So what can be done to change this? "It's a tricky question," says Alan Barrett, a researcher at the ESRI. "In some ways, all of these things are part of a natural economic process. When the economy grows very rapidly, you almost need prices to rise along the way, so that a normal pace of economic growth is restored."

Fianna Fáil has outlined a national development plan that will invest €184 billion in public transport, roads, hospitals, schools, and innovation over seven years. This would provide infrastructure and sustain the construction industry during the anticipated slump in new housing.

Fine Gael and its likely coalition partner, the left-wing Labour Party, launched a policy document with measures to enable more export-driven growth – including expansion of the tax-treaty network with Asia and Latin America – and a Critical Infrastructure Commission to accelerate planning of domestic infrastructure projects. The Progressive Democrats, who were in coalition with Fianna Fáil for the past five years, will invest more than €8 billion in science, technology, and innovation.

There is near-universal agreement that politically unpalatable issues like public-sector reform and long-term investment must be addressed for Ireland to maintain global competitiveness.

'Sweden should adopt Irish policy'

Not everyone agrees that competitiveness is a problem, however. "I don't believe in competitiveness tables, particularly when an index, like that of the World Economic Forum, tells you Sweden is more competitive than Ireland over a period when Sweden has gone from 200 percent to 80 percent of Irish GDP per head of population," says Sean Barrett, a senior lecturer in economics at Trinity College Dublin. "The only policy implication I can draw from those figures is that Sweden should adopt Irish economic policy, as indeed France is about to do with the election of Mr. Sarkozy."

Employment has been rising faster in Ireland than in any OECD country, including the US. "The US foreign investment is vital. The most successful synergy anywhere in the world has been between American investment and Irish managers and employers," he says.

Lyons says there's been a shift away from the US toward the EU as a primary source of exports, so a weakening dollar won't directly affect Ireland. Dr. Barrett agrees: "The US has to restore its competitiveness and the weapon it will use is the exchange rate. That's fine. A prosperous US is good for Ireland."

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