Ireland: Period of economic uncertainty looms after ruling coalition's loss of parliamentary majority
March 1, 2016
Following years of harsh austerity policies, Irish voters punished the ruling Fine Gael and Labour Party coalition led by Prime Minister Enda Kenny in the general elections of 26 February. The coalition saw its parliamentary majority eroded despite the fact that it had spearheaded the Irish economic recovery. The elections yielded a hung parliament with no clear majority, thrusting Ireland into uncharted waters both in terms of politics and the future of the economy.
The latest preliminary results show that the ruling coalition fared worse than expected. Fine Gael lost 28 of the seats it obtained in the 2011 general elections while the Labour Party, Fine Gael’s junior coalition partner, was hit by voter frustration and won just 6 seats, meaning that it lost 31 seats. Fianna Fáil, which all but disappeared in the last election, made a spectacular recovery and trails Fine Gael. Sinn Féin—a leftwing nationalistic party historically associated with the IRA militant group—and a string of new left-leaning parties such as the Anti-Austery Alliance-People Before Profit (AAA-PBP) and independent candidates made important gains.
To understand why the ruling coalition lost so many seats, it is necessary to first understand the different views of the so-called two-tier Irish economy. The coalition government headed by Enda Kenny complied uncompromisingly with the harsh bailout program of 2011 that was requested by the preceding Fianna Fáil government. The bailout resulted in sharp cuts of 13% of GDP in welfare, education and notable tax hikes. After exiting the bailout program in late 2013, the Irish economy improved remarkably and was one of the few bright spots in the Eurozone in 2015: GDP grew 7.0% annually in Q3 2015 compared to the Euro area average of 1.6% during the same time period. Irish 10-year bonds are trading at record lows and government finances have improved notably: the fiscal deficit was reduced from 12.5% of GDP in 2011 to 3.9% in 2014 and the public debt to GDP ratio dropped from 120.2% in 2012 to 107.5% in 2014.
However, other economic indicators do not paint a rosy picture of the economy: figures from the Central Statistics Office show that GNP grew at a significantly-lower rate of 3.2% annually in Q3 2015, wages and unemployment remain below pre-crisis levels and housing prices in Ireland are among the highest in Europe. Opinion polls prior to the election showed that the electorate was more concerned about spending on social services than on economic stability.
With a hung parliament, Ireland joins the ranks of Portugal and Spain where voter discontent stemming from austerity policies yielded a fragmented parliament. Analysts’ views diverge as to what parties will form a coalition, the prospects forming of a stable government and the degree of political gridlock that will ensue. The result of the 2016 general election raises questions about the health of Ireland’s public finances going forward and the pace of fiscal austerity. According to Dan McLaughlin Economics:
“Ireland is now under the Preventive arm of the Stability and Growth pact, which places annual constraints on expenditure and requires the Government, of whatever political hue, to steadily reduce the cyclical adjusted fiscal deficit. Consequently, any incoming administration will have little leeway on fiscal matters, assuming they adhere to the rules, although there is some discretion as to the tax and spending mix preferred. In general, I suspect the new Government, whatever its composition, will do the minimum required to meet the rules, rather than adopt a policy designed to get the debt ratio down more rapidly.”
The fragmented parliament casts great uncertainty. Calls for a “grand coalition” between Fianna Fáil and Fine Gael have emerged as the only possibility of forming a stable government. However, political differences tied to the Irish Civil War (1922-1923) make such an agreement difficult. The two parties also refuse to become partners to prevent anti-austerity Sinn Féin from becoming the main opposition party. Sinn Féin, on the other hand, could strive to form a left-leaning coalition in Parliament, while the three big parties are expected to lure newly-elected independents and smaller parties to their camps. However, this possibility raises concerns about political instability and presents the question of whether Ireland will have to head to the polls once again.