highly indebted to begin with, only experienced half that increase. Ireland, with its booming financial services sector had the gross debt/GDP ratio almost doubling between 2004‐07, to reach a whopping 793 % in 2007. Though Ireland’s net debt was negative, at ‐202% of GDP, previous research indicates the need to consider gross external debt in order to assess vulnerability given the possibility of high risk in the presence of substantial maturity and currency differences for assets and liabilities.

_<u>Yet structural conditions varied substantially.</u>_ <u>Four very different countries‐ whether it be in terms</u> of openness, export composition or labor market dynamics, entered the 2010 sovereign debt crisis. Real GDP growth averaged 4.1%, 6%, 1.5% and 3.8% respectively in GIPS during 2000‐07, with large increases in GDP per capita, compared to 2.2% for the Eurozone and 2.5% for the EU (Figures 2a, 2b).<sup>12</sup> Portugal clearly did not have a “boom” period, but had particularly high and rising debt ratios. Ireland is far richer than Portugal, the poorest, having a GDP per capita around 44% of Ireland’s. Spain’s GDP per capita is 63% of Ireland’s and Greece’s 58%. Ireland is also small relative to the others, being1/10<sup>th</sup> the size of Spain and less than half the size of Greece or Portugal (measured by population). Correspondingly Ireland is also the most trade‐ integrated among all four countries at 153 % of GDP in 2007‐ three times more than Spain or Greece.

Ireland’s economy is distinguished from that of the others by the presence of large multinational corporations and global financial institutions that produce much of value‐ added in the country. The economies of Greece, Portugal and Spain are much more reliant on domestically‐ owned and smaller firms. At the same time, substantial differences in the business climate or governance did not matter in terms of preventing or mitigating a crisis; the World Bank’s Doing Business ranking placed Ireland 7<sup>th</sup> and Greece 106<sup>th</sup> in 2008. On the Global Competitiveness Indicator, Ireland placed 22<sup>nd</sup> and Greece 65<sup>th</sup> . Portugal (46<sup>th</sup> , 40<sup>th</sup> respectively), with a lower GDP per capita and Spain (43<sup>rd</sup> , 29<sup>th</sup> ), with a similar GDP per capita in 2007, had far better performance on several measures of the business climate and institutional quality than did Greece. The dynamic evolution of these indicators pre‐crisis provide deeper insight into the situation prevailing in GIPS relative to other countries. The worldwide governance indicators show rankings of all countries declining for some measures: government effectiveness, and political stability. All except Ireland, have deteriorating regulatory quality and corruption. GPS also fell in the global competitiveness ranking.

Cost developments and export composition provide insight into domestic structural differences that affect the post (2010) crisis path the countries took. Labor costs, as measured by compensation per employee (in PPP US$) rose an amazing 47% in Greece during 2000‐08, as compared with 27.3% for the Eurozone countries on average. Spain was the only one among the four to contain labor compensation around the Eurozone average‐ in Ireland the increase was over 48% and in Portugal, 32%. Data for 2008 indicate that the tax wedge on labor was the highest in Greece (42%), followed by Spain and Portugal (37%) –and lowest in Ireland (22%). However, Greece and Ireland had the strongest increase in average real wages (19%); in contrast, Spain with the best employment performance had no increase in real wages. Clearly, Ireland’s and Spain’s labor markets evolved in very different ways, though both had good employment growth. Spain’s economy created low wage and relatively more unskilled jobs. Rising labor supply may have put downward pressure on wages and given its export basket, industries that grew demanded more unskilled labor. However, Greece’s labor market was stymied by wage increases (the highest among the four) and a relatively inflexible regulatory structure: it was a relatively poor performer

> 12 The largest _increase_ in GDP per capita terms was in Greece, the GIPS growing 28.4%, 20%, 6.2% and 14% respectively, compared with 10.6% for the Eurozone and 14.5% for the EU28.

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