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House prices have dropped dramatically in Ireland because of the recession Photo by: Photocall Ireland

Home truths about our economy

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House prices have dropped dramatically in Ireland because of the recession Photo by: Photocall Ireland

Despite appeals from the Irish government to commentators to minimize negativity in the international media about the Irish economy, we are going to tell the truth here.

The painful truth is that Ireland is now suffering the worst recession of any country in the developed world since the 1930s. That devastating assessment came last week from the most respected economic research agency in the country.  

It sounds like a gross exaggeration. It sounds so bizarre that it's hard to get your head around it. And looking around Dublin these days it's actually hard to believe, because things look relatively normal. 

But it's a fact. We are in a deeper recession here now than any other developed country has been in since the crash in the 1930s.

So in just a few years we have gone from being the fastest growing economy in the developed world to having the worst recession ever in the developed world. We have gone from the global record for growth to the global record for an economic downturn.

The dubious honor of holding the record for the sharpest downturn in the developed world used to belong to Finland, where national income (GNP) fell by 11 percent between 1990 and 1993 when the collapse of the Soviet Union at that time suddenly deprived the Finns of their main market. 

That recession in Finland in the early 1990s was the worst on record anywhere in the developed world ... until this year in Ireland. 

Our national income will fall by 14 percent over the three years from 2008 to 2010. That makes us even worse than the record recession in Finland. And we're in the middle of it right now.  

The figures don't come from some wildcat economist or maverick commentator in search of a headline. They come from the Economic and Social Research Institute (ESRI), the prestigious independent research agency in Dublin which has some of the best brains in the country and is financed by the Irish state.

The ESRI reports are noted for their moderation and balance. They don't do exaggeration. 

That's what makes their latest report on the Irish economy so disturbing. It is the most downbeat analysis of our economy -- indeed of any developed economy -- I have ever read.

The deteriorating situation here is also evident in the latest unemployment figures. As well as the devastating ESRI report last week, the latest official figures for people out of work were published showing that 384,000 people are now signing on for unemployment benefit.

An additional 11,000 people signed on for benefit in April, pushing the unemployment rate in April to 11.4 percent. By the end of this year the number out of work is expected to be around 500,000 or 15 percent, and by the end of next year it could hit 600,000 or even more. The ESRI forecast for unemployment next year is for 17 percent.

After that, according to the ESRI, unemployment should start to level off in 2011. I hope they are right. But I won't be surprised if it gets over 20 percent before it starts to fall again.   

I am basing that not on the kind of expert number crunching that the ESRI does but on my own assessment of how fearful people here are, how much they are cutting back on spending, how fast we are losing jobs, and on how much we have to correct costs here (including labor costs) if we are to become competitive with other countries again. 

I was explaining in this column recently that teachers here (who are threatening action against the government over the modest pay cut that has been imposed on them) earn on average around 30 percent more than teachers in Britain.  

This weekend I spotted another daft example reported in one of the papers here. The chief librarians in the two main universities in Dublin (paid for by the Irish taxpayer, of course) earn twice what their counterparts in British universities of similar size get. 

The best-paid librarians in Ireland are in Galway University, where the pay scale for head librarian is 123,000 ($165,000) to 158,000 ($212,000). In Britain, the salary for head of a university library starts at the equivalent of 47,780 ($63,988).

That's an extreme example, but it's indicative of how far pay got out of line here during the boom. If we're that much out of line with the U.K., you can imagine how far out of line we are with Poland, for example.

This has to be corrected, but the problem is that doing so will further depress spending here and drag down the economy. The correction is already taking place in private industry as companies battle to survive. 

But in the state sector, workers at all levels still have not grasped the new reality. They think the state can just go on paying them their high wages forever. 

The ESRI report says that this year will be the worst, with the Irish economy shrinking by over 9 percent, after a fall last year of over 3 percent. And it predicts that there will be a further decline next year, although it will be only 1.2 percent. Over the three years, the ESRI predicts, the fall will add up to 14 percent.

Exactly how this will affect the number out of work cannot be known, in spite of the ESRI forecast of 17% unemployment by the end of next year. They may well be right, but the exact figure will depend on the level of emigration, including the tens of thousands of East Europeans who have been working here in recent years who will decide to go back home. 

So far, most of them appear to be staying, since welfare benefits here are so much higher than they are on the other side of Europe.

Built into the ESRI figure of 17 percent unemployment here next year (which would equal the jobless peak in Ireland in 1986) is the assumption that there will be emigration of 60,000 over the two years (2009/2010). Which is why I was saying here a few weeks back that you are going to see a lot more young Irish in the U.S. in the year ahead.

Last weekend, the European Union said that the Irish government was still taking an optimistic view and that the recession in Ireland would be deeper and last longer than in the rest of Europe, with the possible exception of one or two East European countries. And they agreed with the ESRI's gloomy forecast about soaring unemployment here.

Why is the recession so much worse in Ireland? How long have you got?

I could fill the rest of this paper with the explanation. But let me hit a few nails on the head for you.

1. During the boom, construction was 15 percent of the Irish economy's total output (GDP).   We were building almost half as many houses each year as the whole of Britain where they also had a property boom, but they have a population of 60 million, 10 times bigger than ours.

Now our property market has collapsed, leaving a huge overhang of unsold houses and a huge hole in tax revenues and spending power here. The recession is now deeper here because we were much more dependent than other European countries (or the U.S.) on the construction sector. 

2. There is a 2o percent fall in the value of sterling, the currency in which Irish-owned firms do 80 percent of their foreign business.

3. Because the Irish economy is so open and so dependent on exports, the international downturn has hit us harder.

4. The boom here led to a huge increase in wages and costs, so that costs in Ireland are now way out of line with other parts of Europe. 

That's why companies like Dell are now pulling out and heading for Poland and elsewhere. On top of the property collapse, this has made the recession here deeper than elsewhere.

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