This commentary originally appeared as an op-ed in The Wall Street Journal on October 7, 2011.

Recently, headline news out of Europe has led investors on a vertigo-inducing roller-coaster ride. Markets have swung wildly on the latest rumors and fears. Skepticism regarding Greece's ability to pay back its debt seems to have hardened. However, lost in all the tumult is one of the euro zone's newly reformed members. Ireland's example could offer other indebted countries some inspiration for solving their own crises.

Ireland was brought down by its wayward, over-leveraged banking system, which fueled a private-sector credit boom and a real-estate bubble. But this financial froth belied strong economic fundamentals and two key competitive advantages for the country: a skilled labor force and a business-friendly regulatory and tax environment. Moreover, fiscal policy was prudent leading into the crisis. In 2007 Ireland's public debt was only 25% of GDP¹ and its budget was balanced, albeit thanks, in part, to strong tax revenues from a credit-fueled economic boom.

The financial crisis and ensuing global downturn dealt a heavy blow. But Irish citizens and politicians rolled up their sleeves and quickly worked to repair and rebuild. The early results are promising, with important strides in regaining competitiveness.

Unable to rely on an exchange-rate adjustment, Ireland has engineered a more than 20% drop in manufacturing unit labor costs since 2008², which boosts its competitiveness equivalent to a 20% currency depreciation. The underlying broad-based wage cuts have been painful, but they are working: Since January 2008 Ireland's trade surplus has doubled, and now runs at more than 20% of GDP³.

This robust export performance more than offset the ongoing adjustment in the domestic economy. As a result, Ireland was Europe's second fastest growing economy in the second quarter of this year, expanding at an annual rate of 2.3%⁴. The recovery in GDP growth in turn helped Ireland not only to meet but to exceed the deficit-reduction targets set by the European Union and the International Monetary Fund.

Last year Ireland was also the first member of the euro zone's so-called "periphery" to return to an external current-account surplus, though it dipped back to a deficit this year. The IMF now expects it to return to a surplus of 2.3% of GDP by the end of next year⁵. This is in sharp contrast to Greece and Portugal, which both have current-account deficits still hovering around 10% of GDP⁶.

Meanwhile, the government has resisted pressure from its EU partners to raise its 12.5% corporate-tax rate. Dublin's regulatory touch also remains light. This business climate, along with a productive and educated work force, has served as a magnet for foreign direct investment, which rose 19%⁷ in the first half of this year, led by technology and services companies.

Ireland's policies have also pulled its banks back from the brink. The country has recapitalized its banking system, which continues to de-leverage aggressively. The country's banking stress-tests have been among the most demanding and credible in Europe-the only ones to have relied on an independent external agency instead of just government regulators.

Beyond the country's strong economic fundamentals, broad social and political consensus sets Ireland apart. Austerity is bitter medicine to swallow, but Ireland's citizens understand there was no easy way out of their predicament and that their short-term sacrifices are laying the ground for sustainable growth in the future. Thanks to this general social consensus-in contrast to the rioting and protests seen further south in Europe-and despite a change in government, Ireland's reforms remain fully on track.

While policy makers in the euro zone take the difficult steps to ensure the single currency's survival, markets will remain volatile and be tempted to paint all embattled European countries with the same brush. But that would only repeat an old mistake. During the first 10 years of the euro's existence, markets ignored the fact that some member countries were accumulating unsustainable imbalances-only to be caught off-guard when sovereign spreads suddenly widened.

Ireland's path forward will be long and demanding. But it also offers a roadmap for other governments that face large debt burdens. If investors would be shortsighted to overlook Ireland's progress toward lower debt and faster growth, other governments would have to be blind to ignore how Dublin has managed it.

Mr. Hasenstab is senior vice president, portfolio manager and co-director of the international bond department for Franklin Templeton Fixed Income Group.

Mr. Hasenstab is senior vice president, portfolio manager and co-director of the international bond department for Franklin Templeton Fixed Income Group.

Footnotes

1. International Monetary Fund
2. OECD, Quarterly benchmarked Unit Labour Cost indicators - By economic activity, http://stats.oecd.org/Index.aspx?DataSetCode=ULC_QUA, accessed on 10/06/11
3. Central Statistics Office Ireland
4. Central Statistics Office Ireland
5. International Monetary Fund
6. International Monetary Fund
7. Central Statistics Office Ireland