Where next for Ireland?

Ireland is only the 119th largest country in the world by land mass and is ranked 53rd by the IMF in terms of its GDP, yet this relatively small nation is currently exerting a considerable amount of influence on the world economy and attracting significant attention as a result of its continuing financial plight.

The recent confirmation that an €85 billion 'bailout' package has been agreed, funded from a range of sources, but mainly the European Central Bank (ECB) and the International Monetary Fund (IMF), coincided with the Irish government's announcement of €15 billion worth of public spending cuts and tax rises to secure the deal and bring pubic spending below 3% of GDP by 2014.

Although this latest phase of the ongoing issues surrounding the Irish domestic economy has been welcomed by many, not least the Irish banking system, which will use €10 billion of the fund to recapitalise while a further €25 billion has been set aside as a 'bank contingency fund', there are already concerns about the additional burden the spending cuts and tax hikes place on the domestic economy.

Pumping up the economy after the bubble burst

Unemployment in Ireland is approaching 14%, caused primarily by the bursting of the country's property bubble in 2008. This threw banks into 'meltdown' as a result of their over exposure to property loans immediately following a period where in 2007, borrowers were being encouraged to take out mortgages of up to eleven times their salaries.

With increased personal taxation and the significant public expenditure cuts, there is a real concern that it will have a serious effect on restricting customer spending and place even greater demand on stronger economic recovery as insolvencies continue to rise, which in turn will reduce government revenues and undermine its economic plan.

Atradius head of risk in Ireland, John Morris explained: "One of the items that causes us some concern is that the country's economic plan is reliant on it achieving GDP growth of 1.75% in 2011 and between 2.75% and 3.25% up to 2014. However, EU Commissioner, Ollie Rehn, has already suggested that they have forecast the growth to be just below 1% in 2011 and 1.9% in 2012, which is likely to have further implications for the recovery process if proven to be accurate, especially as the economy is still contracting in 2010, despite predictions of growth."

However, for a country that is experiencing such dismal domestic economic conditions, its export market is thriving, growing by 6% this year alone and amounting to around €37,500 per capita. Inevitably, this has prompted questions about the country's true economic position, which in some respects has been disguised by its export performance.

Does export strength obscures the true picture?

Since the early 1990s Ireland has been actively and successfully pursuing overseas businesses to invest in the country, resulting in major names such as Apple, Pfizer and Intel setting up operations as their base for European activities.

In 2009, foreign direct investment accounted for almost 70% of Ireland's €159 billion exports according Ireland's investment promotion agency, the IDA. Such is the level of investment and interest form US firms, that the CEO of the American Chamber of Commerce recently said that US companies had invested more in Ireland than in China, India, Russia and Brazil combined.

John Morris added: "Part of the attraction for overseas investment has come from the fact that in Ireland, we have Western Europe's lowest corporation tax of 12.5%. Interestingly, this rate has escaped the government's tax review and continues to irritate our European neighbours who claim that it allows Ireland to compete unfairly. I imagine, it's understandable that this annoyance has now become even more acute as other European countries are among those funding the country's financial recovery."

Given that the Irish bailout package follows so closely on the heels of a similar intervention in Greece, it's inevitable that questions of contagion have risen and the possibility of similar measures being implemented in other ailing European countries.

While most economists, analysts and politicians are confident that this is unlikely to happen and is 'unthinkable', there is a small minority already exploring and even voicing their concerns of a 'Doomsday' scenario where the Eurozone breaks up if policymakers don't implement a stronger strategy to save the Euro.

In Washington, a fellow of its Peterson Institute for International Economics, Jacob Funk Kirkegaard expects that if the Euro was at serious risk then a much more forceful response would be likely. "You would see the European Central Bank printing €500 notes and dropping them from helicopters before Spain was forced to default or endanger the Euro," he said recently.

So what next for Ireland?

Even crystal balls are likely to be ineffective at accurately predicting the situation in Ireland over the next three to four years. The fact that there is a clear dividing line between he surging export economy and the beleaguered domestic one presents different perspectives depending on which side of the fence you're on.

Overseas investment is likely to continue, but this time from Asia, as the IDA has opened offices in Shanghai, Mumbai and Singapore, among others. This in turn will help create jobs and help generate the much needed tax revenues for the Irish exchequer. So if you're an overseas investor seeking a new foothold in Europe, Ireland has a lot to offer.

However Atradius continues to maintain a prudent approach to its overall underwriting strategy in the face of such a depressed local economy. "On one hand you've got a growing export sector, but on the other, the route to domestic prosperity and stability is looking like a long, hard and painful process," added John Morris.

"As key traditional industry sectors, including construction, consumer durables and leisure, continue to be a concern. There will, however be opportunities for Irish businesses, but these are most likely to originate in the food and agriculture sectors alongside the obvious export development. Irrespective of this we continue to closely monitor trends and changes in the Irish market to ensure we maintain a very accurate picture of the business environment. For example, in addition to our regular buyer review, we also revisit the top 300 buyers, by exposure, to maintain a detailed understanding of the volatile conditions and their effect on businesses."

He added: "As we're facing parliamentary elections in early 2011 and a possible change of administration, this could add to the uncertainty, at least in the short term, making it even more challenging to develop clear long-term assessments of the business environment in Ireland."

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