A Silver Lining For Ireland

Almost all press coverage of the recent downgrades of sovereign paper among EU nations has focused on the new credit ratings and outlooks. The media rarely mentions factors that could make those ratings rise or fall in the medium-term future. The headline about Ireland was that Moody’s downgraded its bond ratings by one notch to Ba1 from Baa3. The outlook on the ratings remains negative. The EU/IMF support of the nation’s financial troubles ends in 2013. That support will need to be replaced, most likely sparking the need for a second bailout.

Buried in the Moody’s comments was this:

Moody’s also notes that upward pressure on the rating could develop if the government’s continued success in achieving its fiscal consolidation targets, supported by a resumption of sustained economic growth, is able to reverse the current debt dynamics, thereby sustainably improving the Irish government’s financial strength.

Ireland, in other words, would have to get its financial house in order in a way that is considered unlikely. The country’s growth remains slow, and austerity programs may exacerbate that. The new assistance package may be larger than the first.

But unlikely is not the same as impossible. Ireland still has a well-trained labor force that has benefited from years of multinationals locating service and manufacturing operations there. Ireland’s labor was inexpensive then, but educated to an extent that workers were suited to accomplish complex tasks with efficiency. High unemployment could deflate those labor costs again after several years of increases. The things that made Ireland an attractive place to operate businesses have not entirely gone away.

Ireland has defied calls to increase its corporate tax, which is often as low as 12.5%. “We made it very clear that there will be no reduction in the 12.5% corporation tax rate,” Minister for Foreign Affairs and Trade Eamon Gilmore said according to the Ireland Examiner.

Under the circumstances, Ireland will have to rely on some level of global business recovery, which is what every developed nation is struggling to accomplish. Odds are that any progress will be halted, but that does not mean there will be no progress at all. Skilled labor will have value in a world in which inexpensive workers are abundant, but not the well-educated ones. Low taxes will always make a country an attractive place to do business.

Ireland is ill, but not financially dead yet.

Douglas A. McIntyre