Wider Plan Needed to Address Ireland's Problems

Ireland making progress in overcoming crisis

But borrowing costs are unsustainably high, largely due to external developments

Comprehensive and consistent European action will be necessary to overcome crisis

“The problems that Ireland face are not just an Irish problem, they are a shared European problem that requires a shared solution,” Ajai Chopra, the head of the IMF’s Ireland team, said May 20. “European partners need to make clear that for all countries currently with programs there will be the right amount of financing, on the right terms, and for the right duration to foster success.”

Under the current European crisis arrangements, it has been difficult for Ireland to make headway in restoring economic growth and regaining market access, even though the government has assumed full responsibility for implementing the measures agreed under the international rescue package worth €85 billion that also involves the European Union, European bilateral lenders, and financing from Ireland’s own cash reserves.

“Risks to the program have risen in some respects,” Chopra said. Financial market conditions are more adverse, with spreads at unsustainable levels. This is due in large part to external developments, he added, referring to the continued uncertainty surrounding other euro area countries, most notably Greece.

Mixed picture

The Irish economy continues to suffer from the fallout of the spectacular collapse of its banking system. The economy contracted by 1 percent in 2010, and close to 15 percent of the workforce are unable to find jobs. Banking reforms are moving to a more complex implementation phase, and meanwhile Irish banks continue to rely almost entirely on support from the European Central Bank (ECB) to finance their operations.

Strong commitment

The government has taken decisive action to address the crisis. Bank stress tests were completed in March, and a comprehensive plan to reorganize and recapitalize the financial system is now being implemented.

“Given the depth of the crisis and the size of the private and public debt overhang, it will take time for confidence to be restored. The authorities recognize this and we do not detect any wavering in their commitment to the policies under the program,” Chopra said.

The government has also reaffirmed the commitment to reduce the fiscal deficit to 3 percent of GDP by 2015 while fostering jobs and economic growth. “We support the priority that the government is putting on...