We saw the first ripples of the US sub-prime crisis in the summer of 2007. A year later, the global economy was on the precipice of disaster. Only resolute action by world leaders, Gordon Brown not least among them, and coordinated fiscal and monetary stimulus prevented a re-run of the Great Depression.
Cracks in the Eurozone edifice which had been papered over during the good times were soon brutally exposed. As the crisis enters its seventh calendar year, we are more than half way through a lost decade. The question, particularly on Europe’s periphery is whether one lost decade will turn into two.
2013 promises to be yet another momentous year in Irish economic history; the year Ireland hopes to cease being a ward of the troika; a year plagued with potential banana skins. Without doubt, the fallout from yet another hair-shirt budget will dominate the early months of the year. It follows that we will face into a similarly challenging budget cycle as 2013 draws to a close. Like peeling an apple, the closer you get to the core, the more the pips squeak. Budgets will only get harder.
Ireland will assume the Presidency of the European Council for the first six months of 2013. Where past Irish Presidencies have been both successful and eagerly anticipated, times have changed. As the financial crisis has progressed, the European Council – and its Eurozone offshoot – has reasserted its primacy over the Commission and Parliament as the crucible of European decision-making.
In early 2013, the Irish Presidency will attempt to secure agreement on the EU’s new 7-year budget, the implementation of a banking union, and a reduction in its own bank debt burden, all while trying to remain an honest broker. Ireland is the first bailout nation to hold the Presidency, possibly the harbinger for a 6-month ‘Farmleigh standoff’ with regular protests.
Irish leaders will not be the only European leaders facing the wrath of their electors in 2013: Greece is on the verge of social implosion, with fascists on the march. Germany faces Bundestag elections. Italy too faces national elections as its economy continues to contract and Berlusconi dances the hokey-pokey on a possible return. Spain will continue its own little dance around applying for a bailout. Ireland and Portugal will hope to secure help in emerging from their bailouts even as Cyprus, and possibly Slovenia, will be negotiating their own.
That’s just Europe. Political risks to economic growth abound globally. Negotiations on the so-called ‘fiscal cliff’ in the US may run into early 2013. Geopolitical tensions remain elevated between China and Japan, while Iran and Syria could both give rise to further oil price spikes. These downside risks further undermine the viability of Ireland’s export-led recovery strategy.
One year from now, the Eurozone will still be in crisis; the Middle East will be as volatile as ever; China’s emergence as a world power will still be ruffling feathers; and the Irish economy will not look much stronger than presently.
One year from now, however, after the presentation of the 2014 budget, Ireland is expected to return to ‘primary surplus’, meaning income covers all expenditure bar the servicing of debts, so long as growth doesn’t greatly disappoint.
A country with a primary surplus is in a far stronger bargaining position, not needing access to financial markets in order to make ends meet. Default hardly becomes cost-free, but certainly less costly. Knowing this, creditors may become more pliable. In Ireland’s case, following the recent Greek example, relief of the bank debt burden – if and when it comes – may be made contingent on continuing to meet lenders’ targets.
With a helping hand from the ECB and a bit of luck, Ireland can exit the bailout in 2013. With risks aplenty, however, it is sure to be a year of living dangerously.