After Leaving Bailouts, Ireland, Portugal Must Still Promote Growth

After Leaving Bailouts, Ireland, Portugal Must Still Promote Growth

Ireland and Portugal, though dissimilar in many ways, share the distinction of being the first members of Europe’s troubled periphery to graduate from a bailout. They also share a pressing need to go beyond the budget austerity they have had to adopt and secure fundamental economic and financial reforms. In this, the two countries exemplify a more general need throughout the eurozone and underscore why, for all the gains made in dealing with this fiscal-financial crisis, Europe remains vulnerable to another crisis.

There is much reason to cheer the successful emergence of these countries from their bailouts. In 2011, Ireland and Portugal were effectively insolvent and on the verge of default, with budget deficits exceeding 10 percent of their respective GDPs. They had to pay double-digit interest rates to borrow on capital markets, which exacerbated their financial strains and precluded any chance of relief. The official bailout lifeline, €85 billion for Ireland and €78 billion for Portugal, bought time for needed budget reforms. Now Ireland expects deficits of 4.8 percent of GDP in 2014 and Portugal of 4 percent. The improvement has allowed each nation to return to capital markets, where investors have shown considerable interest in their bonds, allowing Ireland and Portugal to borrow at much-reduced interest rates. To this extent, the bailout has been a remarkable success.

One reason for this is that Brussels set more rigorous institutional arrangements around Ireland and Portugal’s bailouts than it did around Greece’s more ad hoc package. The stronger eurozone nations pooled their resources in what they called the European Stability Mechanism. They then joined with the International Monetary Fund (IMF) and the European Central Bank to form what has been called the troika. This group then offered subsidized financing to Ireland and Portugal in a series of steps, with each tranche conditioned on their reaching certain budget and deficit milestones.

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