MACROECONOMIC POLICY IRELAND

Irish and ECB Macroeconomics Policies

Irish and ECB Macroeconomics Policies

Introduction

The global financial crisis of 2007 has affected the economies of the world to a varying degree, but it had severely affected the GDP of Ireland; which saw a decline of 21 percent from the fourth quarter of 2007 to Q3 2010. This statistics places Ireland among the most adversely affected countries in terms of output performance during this period (Lane 2010, p.n.d).

The main factor behind the severe implications of the financial crisis on Ireland was the devastating boom-bust cycle in the property market of Ireland. The Irish Banks had financed the property boom by lending huge amount. When there was asudden decline in property prices and construction activity, the banks had to face severe losses. The Irish government has a tough role to play in order to bring the economic growth, fiscal sustainability and the banking sector in harmony. The policies designed in accordance with the guidelines of European Central Bank have played a vital role in revitalising the macroeconomic situation in Ireland.

Discussion

The Irish government decided to receive assistance from the EU and IMF in November 2010 primarily because the guarantee of the State expired in September 2010. This expiry meant that private sector funders could exit from the guarantee. The ECB was of the view that downsizing the Irish banking system and improving the capital ratios of Irish banks could make sure that this liquidity support could be maintained. Furthermore, the most severely affected bank of Ireland namely, Anglo Irish Bank changed its management team and decided to make extra provisions to its non-NAMA loans which required further capital injections.

These increasing capital requirements contributed to the concerns regarding the viability of the fiscal sustainability. The total financial package that was offered under the EU-IMF deal was worth €85 billion, ...