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Economy Watch: view from Dublin

By Brendan Keenan

We had a visitor from a Beijing think tank the other week. She wanted to know the reasons behind the rapid Irish recovery from such a horrendous crash.

Everyone is interested. The German think tanks must be very relieved. It looks like the medicine can work. At home, some must be discomfited.

Failed predictions about soft landings have been followed by failed predictions about permanent grounding of the economy. Whoever said economics is a branch of history was probably right.

Not that history is easy. Even austerity seems to have lost its past bite.

Almost all EU countries, whether in bailouts or not, are returning to their pre-crash levels of output at much the same time.

There are certain things about the Irish economy which gave it advantages the other indebted euro countries do not share. Two-thirds of its trade is outside the euro area, mostly to the UK and US. That trade is enormous, as it is bound to be when the likes of Google revenues are part of it.

Another is that structural reform was not really relevant for Ireland.

Studies by the IMF found no few structural problems serious enough to do real harm to the economy.

Sure, there would be advantages if medicines were cheaper, State utilities maximised benefits to customers, and public administration allocated resources on any obviously rational basis. But it would not make much difference to GDP.

That is just as well, because it seems pretty clear that, for governments, structural reforms (let's be neutral and say "changes") are politically more difficult than the austerity measures of higher taxes and spending curbs. The lesson seems to be that specific effects - the arrival of a water bill for instance - cause more trouble than general ones, like a rise in taxes, or even an increase in medical bills.

One way of looking at it is to say that Ireland's government was not so much braver or more resolute than those of other countries, but that it had less of a political challenge.

The structures in Ireland were more conducive to recovery than those elsewhere.

A key political question is to what extent the structure of the labour market helps explain the largely unexpected recovery in employment. A research paper in last month's quarterly report from the Central Bank provides useful information on that question.

We already know that the fall in employment was dramatic, down by 15% in the two years from 2007. Unemployment rose from 4% to 15%, while the hours worked by those still in jobs fell 20%.

Clearly, a lot of that was due to the fall in demand clearest of all in construction, where almost half of firms cut labour costs, compared to a third for the whole economy. Less clear is how much of the cost-cutting was to keep firms alive, and to what extent did it succeed.

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