Wednesday, March 28, 2012

The Celtic Tiger Slipped Into Recession

Ireland slipped into recession in the last quarter. Government spending is down and consumer spending has been affected by the 14% unemployment rate. Given depressed internal demand, the Irish economy depends upon growth in exports. 70% of its exports are produced by foreign firms that manufacture in Ireland and export their products to Europe. Exports fell in Q4, however, due to slow growth in the eurozone.

Ireland's economy was once referred to as the Celtic Tiger because of its high growth rate. Ireland attracted US multinationals with low tax rates, and a skilled english speaking labor force. They export products to the eurozone from Ireland without having to deal with foreign currency issues, and their profits are taxed at a low rate. Export led growth, and employment, contributed to the housing bubble in Ireland. The bursting of the housing bubble led to a banking bailout that is being financed by the taxpayers. The high cost of the bailout has limited the ability of government to use fiscal policy to stimulate the economy. The combination of fiscal austerity and a decline in exports has ended the era of the Celtic Tiger.

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