The Sweet-Tasting Success of Irish Austerity

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

Ireland-based food giant Kerry Group Plc (KRYAF) is well known for its ingredient and flavors business.

This week, the company celebrates the opening of a €100 million global technology and innovation center near the town of Naas, just outside of the iconic Irish capital of Dublin.

The opening of Kerry Group’s new facility represents one of the biggest investments made by an Irish company in Ireland in several years. It is also a sweet-tasting example of the success of Ireland’s policy of fiscal austerity, which is much maligned by the followers of mainstream Keynesian economics.

Back when the Kerry Group announced its big investment in the new facility in 2012, the Irish economy was still wading through a recessionary bog that was the worst in the island’s recent history.

bog

The fallout of the global crisis in 2008 had infected Ireland acutely. Indeed, the malady burst the Emerald Isle’s soaring property bubble. In a familiar pattern, the Irish banking sector collapsed, putting the entire Irish economic patient in critical condition.

Renewed Confidence in Irish Companies

The Kerry Group’s new facility is a sign of the return of confidence in both the Irish corporate sector and Ireland’s broader economy.

According to the Financial Times, the Irish economy is seeing levels of activity not observed since the boom days of the “Celtic Tiger.”

The Financial Times also reported that unemployment has dropped from 15 percent at its peak to 9.5 percent. Mergers and acquisitions have surged recently, driven by both Irish companies and an increase in foreign investment.

Exclusive  Why This May Be the Best Week of the Year to Pile into Stocks

The result?

Ireland today is the European Union’s fastest-growing member state.

And with economic growth expected to hit a Tiger-like 4% and 6% this year — and a stock market that has doubled in value in the past five years as measured by the iShares MSCI Ireland Capped (EIRL) — Irish eyes are indeed smiling.

eirl_0929

But those smiles came only after some serious — and often severely criticized — Irish austerity measures that had induced some frowns in the bucolic county.

From Boom to Bust

During the late 1990s, Ireland had transformed itself from a virtual economic also-ran into Europe’s answer to the “Asian Tigers.” It did so primarily via the pro-growth cocktail of a low corporate tax rate of just 12.5%. That made Ireland a magnet for foreign direct investment, and the result was a booming Irish economy that was the envy of Europe.

Caught up in the fever of economic growth, the Irish government encouraged a debt-fueled property boom that caused the price of an average house to jump more than 4.5-fold between 1997 and 2006. Flush with cash, the government then went on a spending binge.

From 1997 to 2008, investment in Ireland’s health service soared five-fold. Public-sector employment jumped, even as pay doubled. The eventual collapse of this deadly cocktail of the property boom and unrestrained government spending sent Ireland’s boom into a bust almost overnight.

The Irish economy collapsed in 2008, with its gross domestic product (GDP) declining more than 14% in the next two years. Anglo Irish Bank, the most aggressive lender during the boom, had to be nationalized as property values halved. And finally, the government’s budget went from surpluses in 2006 and 2007 to a staggering deficit of 14.3% of its GDP in 2008.

Exclusive  Is the Fed’s Decision the End of the Easy Money Era?

The Austerity Rebound

To combat the decline, the Irish government took a swig of whiskey, bit the bullet and went into austerity mode.

Then-Irish Premier Brian Cowen launched the biggest assault on public services ever seen in Western Europe. The government raised taxes, cut salaries in the public sector by up to 20% and then even went to the “troika” in 2010 of the International Monetary Fund, the European Union and the European Central Bank for a €67.5 billion ($89 billion) bailout.

The austerity measures were widely panned, especially by Keynesian types like Nobel laureate and government spending champion Paul Krugman of the New York Times. Krugman seemed to enjoy pointing out that Irish austerity was a doomed experiment.

Then in March 2013, Ireland successfully raised money in international financial markets, selling a new benchmark bond for the first time since November 2010. That was the beginning of the current boom of which the Kerry Group’s expansion news is just the latest example.

The bottom line?

The Irish austerity (along with those of the less publicized Baltic states) show that a country can indeed emerge from a downward economic spiral by downsizing the public sector, reducing its fiscal deficit and cutting public debt.

And once economic growth kicks in, a lot of formerly seemingly intractable economic problems miraculously solve themselves.

Even Ireland’s debt is falling at a much greater rate than predicted just two years ago by the International Monetary Fund.

So the evidence is in.

Paul Krugman was clearly wrong about the Irish economy and the impact of austerity.

Exclusive  Eyeing Asia’s Largest Emerging Market Fund

And even today, I’m sure other Keynesians can find reasons to explain away the reviving Celtic Tiger’s economic success.

But I suspect that Ireland is too busy enjoying the sweet taste of austerity to much care.

In case you missed it, I encourage you to read the e-letter column from last week about some bullish views on the U.S. market. I also invite you to comment in the space provided below my commentary.

Like This Article?
Now Get Our FREE Special Report:
Alternative Investing: Investing in Timber

Stock Investor editor Paul Dykewicz reveals why investing in timber may be one of the best long-term portfolio strategies you'll find today.

Get Access to the Report, 100% FREE


img
previous article

At the most recent Federal Open Market Committee (FOMC) meeting, the Fed announced that it would keep its target band for the Fed funds rate at 0.00-0.25%. In its policy statement, the Committee said that “recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” This is “Fed speak” for how the slowdown in China, and its impact on other emerging markets through the steep declin

PREMIUM SERVICES FOR INVESTORS

Dr. Mark Skousen

Named one of the "Top 20 Living Economists," Dr. Skousen is a professional economist, investment expert, university professor, and author of more than 25 books.

Product Details

LEARN MORE HERE

Bryan Perry

A former Wall Street financial advisor with three decades' experience, Bryan Perry focuses his efforts on high-yield income investing and quick-hitting options plays.

Product Details

LEARN MORE HERE

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker,
financial journalist, and money manager. As well as a book author and regular contributor to
numerous investment websites, Jim is the editor of:

Product Details

LEARN MORE HERE

Bob Carlson

Bob Carlson provides independent, objective research covering all the financial issues of retirement and retirement planning. In addition, Bob serves as Chairman of the Board of Trustees of the Fairfax County (VA) Employees’ Retirement System, which has over $2.8 billion in assets.

Product Details

LEARN MORE HERE

Mike Turner

Mike Turner’s financial, mathematical, computer science and engineering background serves as the foundation for his disciplined, rules-based approach to trading. Mike’s three services include:

Product Details

LEARN MORE HERE

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street. Since 2010, Hilary's financial publications have provided stock analysis and investment advice to her subscribers:

Product Details

LEARN MORE HERE

DividendInvestor.com

Used by financial advisors and individual investors all over the world, DividendInvestor.com is the premier provider and one-stop shop for dividend information and research.

Product Details

Popular tools include our proprietary Dividend Calendar, Dividend Calculator, Dividend Score Card, and many more.

LEARN MORE HERE