The "Emerald Isle" dubiously and tentatively became the second member nation this year to officially ask for a financial bailout from the European Union's central bank as the global economic downturn continues to plague high-debt countries across the Atlantic.
Ireland's Prime Minister Brian Cowan, after months of putting on a brave public face that the nation would not need assistance, announced Sunday that Ireland agreed to take a bailout package and will commit to a four-year austerity plan to reduce its swelling budget deficit. It is estimated the aid package, to come from the European Union and the International Monetary Fund, will be worth at least 80 billion Euros (nearly $125 million).
Ireland's economic situation became increasingly untenable amid rising budgetary costs tied to widespread bank failures caused largely by the bursting of an overheated, unsustainable housing bubble that ushered in a new wave of prosperity there last decade. The situation is not entirely unlike the real estate bubble that struck in the United States, among many other nations, and helped spark a deep economic downturn. Ireland's credit rating was downgraded by both Moody's Investment Services and Standard & Poor's, which caused defensive Irish leaders to call the ratings' systems flawed and even mock the performance of the big three, which also includes Fitch Ratings, publicly for their own poor performance in predicting the downturn.
Moody's Analytics Economist Melanie Bowler predicted the move likely will help European banks regain some confidence, at least in the short-term, but it also almost assuredly will impede the prospects for any kind of Irish rebound and longer-term growth.
"Multinational companies, the backbone of the Irish economy, may start to look elsewhere," she said. "Following a sharp deterioration in competitiveness in the 2000s, some firms decided to relocate to cheaper locations in Europe. While recent wages cuts and weak price pressures are helping boost Ireland's traditional advantage, the bailout will raise questions about the stability of Ireland as a destination for foreign direct investment."
Perhaps more important is the likelihood that corporate taxes will be increased, said William Reinsch, director of the National Foreign Trade Council trade association. Those companies that made significant financial investments, such as the construction of large factories, may be stuck. However, those without as many strings indeed may look elsewhere. The most sensible way to prevent flight may be to hold back on the likely desire to up those taxes but the need of the badly damaged economy might make such a strategy impossible, said Reinsch.
"What happens to their tax rates is the first question that needs to be asked, but it is not the first question that will be answered, honestly," Reinsch told NACM. "Those who made less of an investment [such as doing little more than locating some research and development operations there] may have incentive to relocate. It's hard to say, as none of that has been broached yet."
Working in Ireland's favor on the business front, however, is the fact that many of the companies that moved some operations are very large. This could render a quick exit strategy difficult to implement or unlikely to occur, based on previous history.
"Some companies are like aircraft carrier -- they don't turn on a dime," Reinsch told NACM. "It takes them a while to evaluate what's happening."
Brian Shappell, NACM staff writer