Essay on ECONOMICS FOR GLOBAL BUSINESS

Favorable corporate tax structure in Ireland helped it become a starting point of interaction for many foreign companies in the European market, and this in turn contributed to the strong economic growth in the early 1990’s to 2008. But this growth led to a financial “bubble” in real estate, and financial sector overloaded with debts made the country particularly vulnerable to the financial crisis of 2008. Between 2007 and 2010, Ireland’s GDP fell by 18% (Armingeon and Baccaro 257). The economic decline was one of the factors that forced the country to seek help from the European Union and the International Monetary Fund (IMF) in order to save its financial sector from bankruptcy, and in 2010 the International Monetary Fund and the European Union allocated 85 billion euros to the country. In return for this help the authorities took obligation to slash its budget deficit and government spending. At the moment, Ireland has met all the conditions of the program of economic aid, but this has appeared to be not enough. Back in March 2012, the rating agency Moody’s reported that the country was likely to need a second aid package when the first program came to an end. However, Ireland’s economic dependence on external partners means that it has virtually no control over its fate.

Currently, the majority of households are in debts: debt-to-income ratio made 203% in 2010, far above the average indicators for the Eurozone (98%), which led to the decrease in domestic consumer spending and investment. According to the May figures of the Irish Central Bank, one in ten citizens of Ireland with an active mortgage already has unpaid debts. For comparison, at the end of 2011, the volume of mortgage debt arrears made only 9.2% (Conefrey and FitzGerald 94). The cause of such a complicated situation in the country is seen in the severe blunders of banking organizations. Conefrey and FitzGerald (95-96) mark that in most cases the loans were given even to those borrowers who should simply be forbidden to borrow for housing, taking into account the existing criteria and mathematical models.

The report of the Central Bank of Ireland also says that at present, the potential risks of losses are distributed among 116’288 mortgages. This means that in case of future economy deterioration, about 15.2% of all mortgages may just burst, while the last year this indicator was held at the level of 14%. The situation of individual banks is even worse: in particular, the losses of Allied Irish Banks Plc. account for 32% of all mortgage loans (Conefrey and FitzGerald 96-98).

Lowering consumer activity is also caused by high emigration levels: about 50,000 people (1% of Irish population) left the country only in 2011 (Armingeon and Baccaro 259). The causes for this are high unemployment levels and decline in production and exports. However, in October-December 2011, the economy grew by only 0.7%. Ireland’s 2011 budget deficit made about 9.4% of GDP, which was significantly below the limit set by the terms of the financial assistance program (10.6% of GDP). Meanwhile, earlier this year, the IMF lowered the 2012 growth forecast for the Irish economy from 1.9% to 1.5%. According to the European Commission forecasts, Ireland’s GDP in 2012 can grow by only 1.1%, while the previous report projected the growth of 1.9%. Ireland’s budget deficit by the end of this year is expected at the level of 8.6% of GDP (FitzGerald 1240-42).

According to IMF estimates, it will generally be very difficult for Ireland to bring the budget deficit to the planned performance in 2013 due to the deteriorating situation in the economy. The GDP growth by the end of the year will be only 0.4% and is expected to make 1.4% in 2013. Similar forecast released in June expected an increase of 0.5% and 1.9% respectively. The unemployment rate will probably rise to 14.8% from 14.4% in 2011, and next year it will be reduced again, together with the growth of the economy to the level of 2011. This year, the state debt will make 103% of GDP, and is to rise up to 107.6% in 2013. Meanwhile, the Irish prime minister promises to reduce the budget deficit down to 7.5% of GDP in 2013 from the current 8.3% (FitzGerald 1241-43).

The thing is that in addition to domestic demand, an important factor in the growth of Irish economy is export. Meanwhile, domestic demand, which is reducing due to the uncertainty inside the country and general crisis in the Eurozone, discourages foreign investments in the country; external demand also gets decreasing, which being put together, imply difficulties for households’ ability to pay debts (Bertaux and White 205). As Ireland’s economy shows very modest growth, further policy measures are required to deal with the risks remaining significant. IMF economists assume that in the first place, the Irish economic authorities have to rebuild the banking system and public finances, as well as focus at stimulating domestic demand through structural economic reforms (FitzGerald 1247). In particular, Ireland should start the production of Treasury bills this fall and reduce the debt to previously planned levels. The compliance assessment for Ireland will be its return on the debt market this year (tested since July) and the bond market in 2013 (Armingeon and Baccaro 262).