While nominal labour unit costs in Germany rose by 5.9 %, and 8.1 % in the UK during the last three years, Irish labour unit costs fell by 12.2 % during the same period due to the imposition of wage cuts (especially in the public sector) and a significant increase of the productivity of Irish employees. Compared to the Irish, across the entire EU only Latvian workers faced a bigger labour unit cost losses (-15 %) according to official EU statistics (European Commission 2012: 24).      

The Irish government implemented all austerity cutback demands set by the EU/ECB/IMF Troika without hesitation. In turn, Commission President Barroso (2013) celebrated Ireland at a recent conference of the Irish Business and Employers Confederation (IBEC) because the Irish case apparently “shows that the [Troika] programmes can work.” In recognition of these efforts – we were told by the Government a few weeks ago – the EU and the ECB accepted a restructuring of the Anglo Irish Bank debt which reduced Ireland’s short term liabilities by one billion euro.

So where is the sudden demand for an additional one billion euro cut of Irish public sector pay bill coming from? Why is the Government determined to break the Croke Park I agreement that was supposed to run until June 2014 and to take an additional billion out of the economy? The answer to this question is surprisingly simple. The Government and Troika underestimated the negative impact that austerity cutbacks have on the growth rate of the economy:

According to Olivier Blanchard, the fund’s [IMF’s] top economist, the impact of fiscal consolidation is “large, negative, and significant”. The size of this effect is bigger than the fund previously thought. “Fiscal multipliers”—the change in GDP growth that results from a change in the government’s structural budget deficit—were thought until recently to be 0.5. New IMF research now suggests a multiplier effect of 0.9-1.7 is more likely. So deficit reduction of one percentage point could knock up to 1.7 percentage points off growth (The Economist 2012).

Roland Erne is a SIPTU staff representative and Lecturer in International and Comparative Employment Relations at University College Dublin

Click here to view or download the full article