Happy St. Patrick's Day, Ireland! Now About That Miserable Economy ...

The humbled country needs a "yes" vote and a pinch of good luck to keep fighting its way out of a deep recession

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DUBLIN -- It is St. Paddy's Day, and Irish Prime Minister Enda Kenny is far from lucky.

Ireland's economy still lingers deep in recession. Unemployment runs at 14%, and house prices are down by half. The prime minister's Fine Gael-Labour government now faces a referendum on the German-backed EU fiscal compact. There is no clear path forward. The opposition is gaining steam, branding Kenny's party as "Angela's Asses." Meanwhile, Irish voters are a prickly lot. They rejected EU treaty changes in 2001 and 2008.

What if they say no, again? The worst-case scenario is that Ireland will have no access to funding after next year (either in the bond market, or from the new European Stability Mechanism bail-out kitty), and will need to contemplate debt restructure and eventual exit from the euro. The best-case scenario is that, as in 2002 and 2009, we will keep voting until we get it right. Or the EU alters the proviso making accession essential for borrowing pennies from the stabilization mechanism.

To be fair, the fiscal pact is an unlovable document: drafted in a rush by Merkel and Sarkozy, equally unsatisfying to the left and the right, and creating budgetary conditions unmet even by Germany and France (or hardly any other nations apart from Luxembourg and Finland). It learns the worst lessons from the streamlined politically- and centrally-driven processes, which bore us the Common Monetary Policy and the euro.

Compared to Britain, where the middle classes have borne the brunt of austerity measures, in Ireland these have pinched the wealthy hardest (with incomes of the top 10 per cent of earners falling most: 13 per cent in real value since 2009). A rise in the state pension in 2009 has sheltered the elderly, but public sector workers have felt pay cuts and pension levies not experienced by those in the private sector.

Other losers are the 400,000 immigrants -- 10 per cent of the state's population --who came in the later boom years to work in construction, industry and tourism. Accordingly they suffer a higher rate of job losses, and if they've identifiably foreign names, are 50 per cent less likely to be called for a job interview.

Emigration is expected to hold constant at roughly 50,000 a year, but despite recession, the nation has not sunk into collective despair. Fully 79 percent of Irish adults told the EU Survey on Income and Living Conditions they had been happy "all or most of the time" in the previous four weeks.

Perhaps because they're having babies. In south Dublin's Marley Park on Tuesday morning, 14 new mothers in a mother-and-baby fitness class jogged around a field behind their prams. Austerity Ireland's birth-rate is the highest in Europe. Perhaps, with such high unemployment, the cost of being in labor instead of being in the labor market is low.

This is bad news, mind you, and not just for those who dislike nappies. The biggest, and only sustainable, gain of the Celtic Tiger economy lay in coaxing women into the workforce, as fertility fell and Catholic strictures weakened. They drove productivity, being educated and commanding starting wages lower than men who had been in the workforce without interruption. A higher upper marginal tax rate further bats down the opportunity costs of women opting to work.

In the early Celtic Tiger of 1990-1999, Ireland caught up -- unsustainably, but solidly -- with other European economies. But in the credit and housing bubble-driven economy of 2003-2007, school-leavers were duped into acquiring skills in an artificially robust construction sector, ones that will now stand them poor wages even in Australia or Canada. And the visa routes towards the skills-based immigration of the 1990s drew to a trickle after 2004, so that even with a 14.6 per cent unemployment, Ireland possesses approximately 5,000 vacancies in its technology sector which cannot be filled from within Europe.

But back to the referendum. The government should scrape a "yes" vote -- particularly (though unlikely) if Enda Kenny can show he's won fresh concessions from Brussels. But he'll need to keep his opponents from branding it an opportunity to show discontent with EU and IMF austerity measures. If other naysayers can do that, Ireland and the euro are in for choppy waters indeed.

Source: Reuters