Oil price rise 'will wreck Republic of Ireland's recovery'
Published 02/03/2011 | 08:00
The Republic's economy will shrink more than 3% this year if oil prices rise to $150 (£92) a barrel, while at least one country on the eurozone's periphery would be likely to default, Ernst -amp; Young economist Marie Diron warns in a new report.
The price of Brent crude skirted $120 (£73) last week and many analysts said it could rise further if the protests in Libya spread to other repressive oil-producing regimes, such as Saudi Arabia.
Falling growth in the Republic and elsewhere in Europe if oil rose to $150 a barrel would create renewed turmoil on sovereign debt markets and further hurt the banking sector, which would in turn require new bailouts.
"With little room for manoeuvre on the fiscal and monetary policy sides to buffer the negative economic impact, the outlook for the region would turn very bleak for several years to come," the Paris-based economist wrote.
Ms Diron says the Irish economy will contract by 2.6% this year if oil stays at $120 and shrink by 2.3% if oil stays at the $85 (£52) levels seen last year.
A further contraction in gross domestic product this year would put an end to the optimistic growth forecasts used by the Irish Department of Finance and the political parties in last month's election campaign.
More importantly, it would make it all but impossible for the new government to pare borrowing to 3% of GDP by the 2015 deadline imposed by the European Commission. That means that the commission may insist on further cuts.
Rising oil prices would trigger a double whammy for Ireland, Ms Diron believes, by pushing up inflation elsewhere in Europe, which would force the ECB to raise interest rates earlier than normal.