In Ireland, austerity is praised by Angela Merkel

After belt-tightening, a turnaround is finally on the horizon as modest growth returns

DUBLIN — As European leaders scramble to overcome the Continent’s debt crisis, many are pointing to Ireland as a model for how to get out of the troubles.

Having embraced severe belt-tightening to mend its tattered finances, Ireland is showing glimmers of a turnaround. A year after it received a 67.5 billion euro bailout, or about $90 billion at current exchange rates, modest growth has returned and the budget deficit is shrinking.

But the effects of austerity have pummeled Ireland’s fragile economy, leaving scars that are likely to take years to heal. Nearly 40,000 Irish have fled the country this year alone in search of a brighter future elsewhere; the trend is expected to continue.

“This is still an insolvent economy,” said Constantin Gurdgiev, an economist and lecturer at Trinity College in Dublin. “Just because we’re playing a good-boy role and not making noises like the Greeks doesn’t mean Ireland is healthy.”

The German chancellor, Angela Merkel, recently praised the Irish prime minister, Enda Kenny, for setting an “outstanding example,” while the French president, Nicolas Sarkozy, declared that Ireland was already “almost out of the crisis.”

Underneath the surface, however, the grinding reality of Irish life belies those glowing commendations.

Salaries of nurses, professors and other public-sector workers have been cut around 20 percent. A range of taxes, including on housing and water, have increased. Investment in public works is virtually moribund.

On Monday and Tuesday, Kenny’s government is announcing an additional 3.8 billion euros in tax increases and spending cuts for 2012 that will hit health care, social protections and child benefits.

Retail sales fell 3.8 percent in October from a year earlier as spending was down even on things like school textbooks, shoes and other basic goods.

At a Spar convenience store in the center of Dublin, Samantha O’Donnell, a mother of two, filled her shopping basket with some necessities, then put a few back on the shelf.

“A lot of people are just trying to get by week to week,” said O’Donnell, who said her salary as a nursing assistant had been cut.

To Sean Kay, a professor of politics at Ohio Wesleyan University and the author of a recent book examining Ireland’s crisis, O’Donnell’s experience is typical. “The Irish are being praised for doing what they were asked to do, which is important for bringing investors back to the country,” he said. “But for the Irish people, it’s not paying off.”

There are signs of improvement. Compared with the previous year, exports are up 5.4 percent for the first nine months of 2011, fueled by gains from Pfizer, Intel, SAP and other multinational companies that were drawn to Ireland in the 1990s and 2000s by its low taxes, well-educated English-speaking workforce and access to the European market. New information technology companies like LinkedIn and Facebook have recently arrived.

Prospects for local technology companies are improving, too. Brian Farrell founded Tethras with a partner three years ago to develop mobile applications for smartphones. He now has 16 employees and hopes to double his workforce in the next 18 months.

“Every time you turn the radio on, companies in IT are hiring,” Farrell said, referring to information technology.

Gross domestic product grew 1.2 percent in the second quarter from a year earlier, compared with a decline of 0.4 percent for all of 2010 and seven percent in 2009.

The interest rates that Ireland would pay its international creditors if it were not on a financial lifeline have also fallen, to 8.7 percent today from 14 percent in August, in part because investors hope European policymakers will resolve the broader debt crisis.

But that is still above the level that led Ireland to seek a bailout and too high to allow for sustainable finances.

The budget deficit has fallen to around 10 percent of gross domestic product this year from a staggering 32 percent in 2010. But even under the best circumstances, it will not reach the Europe-wide target of three percent until 2015.

Moreover, the recovery looks to be short-lived, probably putting that goal out of reach. The Economic and Social Research Institute, based in Dublin, recently cut its 2012 growth forecasts for Ireland in half, to less than one percent. It cited an expected recession in the wider eurozone, in part because the austerity being pressed on much of Europe by Germany and the European Central Bank is seen as worsening the prospects for recovery rather than improving them.

“The present situation contains elements reminiscent of policy during the Great Depression, when a mounting crisis was confronted by an orthodoxy that resulted in great poverty that could have been avoided,” the institute wrote in a report.

Pain is inevitable in any nation overwhelmed by its debts, which in Ireland continue to climb rather than fall as a percentage of gross domestic product. But the Irish example shows the dangers of taking from ordinary people to pay off creditors rather than sharing the burden more broadly.

For example, welfare payments have steadily been reduced even as the unemployment rate has ticked up to 14.5 percent, and is forecast to remain high at least through next year.

The Irish don’t often have protests, but now more are being organized, inspired by the Occupy movement in the United States.

On a recent frosty night in Dublin, David Johnson, 38, an IT consultant, stepped outside a makeshift camp set up by the Occupy Dame Street movement in front of the Irish Central Bank.

“This is all new to Ireland,” he said, pointing to tarpaulins and protest signs that urged the government to boot out the International Monetary Fund and require bondholders to share Irish banks’ losses that have largely been assumed by taxpayers. “The feeling is that the people who can least afford it are the ones shouldering the burden of this crisis.”

Joblessness would be much higher, economists say, if not for the rising tide of Irish people leaving for Australia, Britain and Canada as opportunities at home stagnate. Thousands of students and construction workers left this country of 4.5 million people after the economy slid into recession in 2008, most of them expecting to be away temporarily.

But now, accountants, engineers, dentists and other high-skilled professionals are moving with their families. And many are not looking back, said Edwina Shanahan, a senior manager at Visa First, a company that helps set Irish citizens and others up with visas abroad.

Deirdre Cronin, 29, an accountant in Cork, plans to move in the new year with her husband and two young children to Australia, which has become a mecca for tens of thousands of Irish seeking a brighter future.

“We feel we would never be able to give our children an opportunity” in Ireland, she said. “We’re going to work hard out there, and earn a decent living.”

The exodus of workers from declining areas to growing ones is one way economies rebalance. But it could take years to do so. In the meantime, many Irish acknowledge that they fear that the hard gains Ireland has eked out could be swept away if Europe’s leaders fail in their latest effort to prevent the crisis from fracturing the monetary union.

“The eurozone is entering a very serious slump, and it is not certain the euro will survive in its current form,” said Simon Johnson, a professor at the Massachusetts Institute of Technology’s Sloan School of Management and a former chief economist at the IMF. “Why Ireland would want to spend its time being a model student in the context of the broader European mishandling of the situation, I don’t know.”