Keeping an Eye on Ireland

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This is a guest post by Sean Kay. He is professor of politics and government at Ohio Wesleyan University and an associate at the Mershon Center for International Security Studies at The Ohio State University. He is also the author of the forthcoming book Celtic Revival: The Rise, Fall, and Renewal of Global Ireland (Rowman & Littlefield, 2011).
Just three years ago, Ireland was hailed as a model of economic progress in the “Celtic Tiger”. In 2005, Tom Friedman of the New York Times lauded Ireland – saying that: “I do get a little lump in my throat when I see countries like China, India, or Ireland adopting a pro-globalization strategy, adapting it to their own political, social, and economic conditions, and reaping the benefits. Mr. Friedman saw Ireland as: “One of the best examples of a country that has made a huge leap forward by choosing development and reform retail of its governance, infrastructure, and education.” In the 2008 presidential campaign, Sen. John McCain laid out Ireland as a model for America to emulate.
So confident in their way of doing things were Irish leaders that when some Irish economists began warning of the Irish housing and construction bubble in 2007, the former Prime Minister Bertie Ahern said to an applauding audience that he did not understand why people who were talking down the economy – “cribbing and moaning” – he said – “I don’t know why people who engage in that don’t commit suicide.”


A culmination of reforms that began in the 1960s were consolidated by the late 1980s to create the Celtic Tiger – a unique combination of a low corporate tax rate (12.5%), a highly-educated and English-speaking population, at a good geographic crossroads between Europe and North America, membership in the European Union, and, eventually, the Eurozone. Ireland was, by 2000, sustaining growth rates on average of 9.66 percent and very low unemployment. Ireland was consistently ranked among the most globalized countries in the world and became a popular location for foreign direct investment.
In 2001, obsessed with high growth rates and newfound money the Irish government created a set of low regulation and tax incentives that turned its mortgage and lending system into something that made a Las Vegas Casino look like a Church. By 2000, housing prices were (according to The Times UK), “outpacing incomes and rents by more than five to one. Household debt as a percentage of GDP had jumped from 60 percent to almost 200 percent.” Across society, a person’s value was increasingly seen in material terms, i.e. how much money they had, how many properties they owned, where they vacationed, and how often – in short, greed took over.
By 2008, Irish banks had, as the New York Times reported this spring, built up 2.5 times the country’s GDP in loans and investment that “pushed the frontier in terms of reckless lending.” That September, it all came crashing down, as Irish banks were almost overnight found to be largely insolvent. The government initially looked to a blanket guarantee of all Irish banks worth a total in liabilities of 485 billion euro – hoping to attract capital. Since at the time the GDP of the Irish economy was 207.4 billion euro, this move was radical in the level of risk assumed. Paul Krugman of the New York Times estimated that this commitment put the country’s liabilities at the equivalent of $30 trillion had the same thing been done in the United States.
Meanwhile, Ireland committed to bail out several of its own banks – including the most insolvent Anglo Irish Bank. To this day, no one really knows how much liability the government is into with these banks. The Irish Times estimated in April that the likely total costs of the bailout would be 82 billion euro.
This fall, Ireland’s crises became acute as Standard & Poor lowered Ireland’s credit rating and announced its outlook was “negative” and asserted that banking liabilities would make its 2012 debt-to-GDP ratio 113 percent. International lending agencies reacted as the relative costs for Ireland to borrow grew substantially. In September, the interest rate on Irish government 10-year bonds reached 6.7 percent. By early this month, the rate crossed 9 percent. Ireland is now solvent only through June 2011. Peter Boone and Simon Johnson, writing in the New York Times estimate that each Irish family of four will be liable for 200,000 euros in public debt by 2015.
As the crisis in Ireland deepened, it rattled the European markets, raising contagion risks first to Portugal and then to Spain and possibly Italy. There are limits to how far Germany can go to keep the Eurozone periphery afloat and that became clear over the last two weeks as pressure grew on Ireland to accept a European Union and International Monetary Fund (IMF) bailout. In a surreal turn, this past weekend, while international press reported that such a bailout was in the works, the Fianna Fail government repeatedly denied it – further eroding its credibility. The government has now agreed that, once the budget is done and the bailout negotiated, it will call elections in the new year – adding even more uncertainty to the economic situation.
To meet expectations of the European Union, the Irish government is about to bring forward a four-year plan for 15 billion in deep budget cuts. Presumably, this budget will be passed with help from opposition parties who would as soon see the current government take the blame. However, political haggling and massive public pressure that will likely soon appear could cause delays that Ireland and the Eurozone cannot afford. It is also conceivable that the government, which is barely hanging on by a narrow majority, could collapse – sending the entire political situation into a nightmare for European Union and IMF negotiators and thus delaying the bailout.
Most likely the budget will pass but the toll will run very deep in Irish society. Health care, basic social services, education – the essential things that Ireland needs for social stability will be pressed to the limits over the next five years. Unemployment will likely go well beyond the existing 14 percent and emigration of Ireland’s best talent is once again afoot. As Irish economist Morgan Kelly wrote in the Irish Times a year ago: “By 2015 we will have seen what happens when jobs disappear forever…Ireland is at the start of an enormous, unplanned social experiment on how rising unemployment affects crime, domestic violence, drug abuse, suicide, and a litany of other social pathologies.”
The harshest of realities for the Irish is that they really have no remaining policy levers to pull. Basically, Ireland can cut its budget, and raise personal taxes and it will almost certainly have to raise the 12.5 percent corporate tax rate. Ireland is under major pressure right now from the American Chamber of Commerce not to do this. But in the basic political choice will be – should we kick old pensioners into the streets – or should we not raise by a few percentage points the tax rate on wealthy foreign direct investment? Even if the tax rate goes to 18-20 percent, Ireland will still be one of the more competitive tax countries in Europe.
By November 2010, IMF tables were showing the sovereign debt holdings as so massive in Ireland, that they literally went beyond the IMF chart’s page. Morgan Kelly wrote this month in the Irish Times that: “After a massive credit bubble and with a shaky international economy, our growth prospects for the next decade are poor, and prices are likely to be static or falling. An interest rate beyond 2 per cent is likely to sink us. This means that if we are forced to repay the ECB at the 5 per cent interest rate imposed on Greece, our debt will rise faster than our means of servicing it, and we will inevitably face a State bankruptcy that will destroy what few shreds of our international reputation still remain.” It is thus very important that in putting together the loan package, the European Union – especially Germany – should remember that most of the Irish people did not cause this crisis – but they will be the ones to suffer. And, eventually Ireland does need room for economic growth if it ever hopes to pay back these loans.
It took Ireland over 30 years to get to the point of the original Celtic Tiger. The foundations for it were strong. The aberration was a devastating eight year period of crony capitalism and greed run amok. But the Irish people have the tools they need for renewal. The first key tool is a steady and strong realism. No longer are there things that “we just don’t talk about” in Ireland – burying the head in the sand is not an option. That is actually a major progressive evolution in this society where to admit problems has traditionally been seen as a sign of weakness.
Ireland also has gone through extraordinary social changes in the very recent past. It is confronting the Catholic Church abuse scandal openly and transparently. It has embraced a progressive agenda on gay rights including passing civil partnership laws this past summer. Ireland has a foreign policy that is a model for connecting interest with values. Ireland still has a business friendly environment and works carefully with some of the most important high-end manufacturing, especially pharmaceutical and software sectors. Most importantly, Ireland has become a very multicultural society which creates precisely that kind of human capital for the twenty-first century at which other nations, like Germany, are failing.
In the near term, though, Ireland will likely face one of the deepest declines in standard of living in modern history – and that will push society to its limits. An obsession with economic growth destroyed this country. Had Ireland pursued slower growth in 2001 more people would have benefited over a long period of time. Instead, Ireland, like our Wall Street banks, doubled down on a bad bet. Too many people in Ireland, and in the United States pine for the quick fix, to get back to growth, back to wealth, back to the easy street. That is not realistic, or, as the Irish lesson tells us, wise. Meanwhile, a political system that benefits only the few, in the end, benefits no one. These basics of politics and economics will require a serious rethinking, and in so doing, Ireland can provide a positive model for the world if it handles this transition well and creatively.
In conducting interviews for my forthcoming book on Ireland’s crisis and opportunity, I met with former Prime Minister and EU Ambassador to Washington, D.C., John Bruton. He rightly said that Ireland needs “a million small steps, rather than one or two big ones.” Its people are productive, they know how to do a lot with little. I would add that the Ireland of today is not the Ireland of the 1980s – the infrastructure is improved, it is modern, it is European, it is global. The foundations for renewal are there – but this will take a long time and the immediate future is bleak.
People across Ireland will have to steady themselves for what is to come and its government will have to rise to the occasion in ways that the country has not seen since its founding. But, in the end, the prospects are good. As Bill Clinton said this fall at a speech in Dublin: “We’re going to be just fine. Get your confidence, get your Mojo back. Take the bitter medicine you have to take. But this is not the drab horrible story that drove starving immigrants to the shores of the United States 200 years ago. This is a story of prosperity gone array…we just have to get our Mojo back, and we are going to do it.”
— Sean Kay

Comments

13 comments on “Keeping an Eye on Ireland

  1. DonS says:

    . . . but no tampering with the sacred corporate income tax rate. As in the US it seems, genuflecting at the corporate altar is required.
    I understand basic economic considerations, although not the intricacies of Irish calculus; but if someone really understands this, please enlighten. Is the balance of frightening off, or not attracting, all those high tech corporations really so precarious that it could bear another few percentage points?

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  2. Don Bacon says:

    Ireland has rolled out its new budget. It includes:
    * 10bn euro cut in expenditures
    * 5bn euro increase in taxes
    * more than 24,000 jobs cut in public sector in four years
    * VAT tax increase to 22% in 2013, and 23% in 2014
    * Gov’t may tap the pension fund
    http://tinyurl.com/37xuwxr

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  3. Don Bacon says:

    “If the euro could collapse, they’d be jumping for joy across the pond.”
    Jump for joy when your currency collapses? And possibly the European Union?
    from Speigel, 22 Nov 2010
    Can the Euro Still Be Saved?
    Belgian politician Herman Van Rompuy president of the European Council a year ago: “We all have to work together in order to survive with the euro zone, because if we don’t survive with the euro zone we will not survive with the European Union.”
    The countries of the euro zone are hopelessly divided over the question of how to save the currency in the long term. Bailouts for individual countries like Ireland and Greece can only be a temporary solution.
    Euro-zone governments have spent months trying to end the crisis facing their common currency, but the danger has not been averted. On the contrary, the crisis meetings have returned and billions in emergency funds are needed once again. And there is still no end in sight to the crisis.
    European leaders have tried all kinds of measures in the bid to save the euro. They approved a bailout program for Greece and a massive rescue fund for the entire euro zone, they whipped legislation through their parliaments and they expanded the articles of the Lisbon Treaty to their legal limits (and beyond, many would argue). The European Central Bank (ECB) has even violated an ironclad taboo by buying up the bonds of ailing countries in an attempt to stabilize their prices.
    But those steps only brought temporary relief, which only lasted until the next piece of bad news emerged. Yesterday it was Greece, and now it’s the sorry state of Irish banks that poses a threat to the common currency. Each new report fuels the suspicion that the problems may be so pervasive that they can no longer be solved with conventional methods and by taking on more and more debt. Fears are growing that the crisis could lead to the default of individual countries or possibly even the collapse of the euro zone.
    http://tinyurl.com/2vqn2kl

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  4. DakotabornKansan says:

    Keeping an Eye on Ireland – The Sad Plight of Ireland’s Abandoned Horses

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  5. DakotabornKansan says:
  6. John Waring says:

    No need to tar and feather any bankers. Just break the big six into little bits. No one group of human beings is capable of managing a monstrosity like CitiCorp. Take an axe and give it forty wacks. Here is one of the great failures of Obamadom. He wasted a heaven-sent crisis/opportunity.

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  7. DonS says:

    Terrific article. Sobering.
    “Too many people in Ireland, and in the United States pine for the quick fix, to get back to growth, back to wealth, back to the easy street. That is not realistic, or, as the Irish lesson tells us, wise. Meanwhile, a political system that benefits only the few, in the end, benefits no one.”
    But, in the US at least, the banksters and high rollers are back in the swing. So the idea that a political system benefiting the few really doesn’t apply to banksters, even though in the long run the theory is sound. Deflation, here we come.
    http://dealbook.nytimes.com/2010/11/23/signs-of-swagger-wallets-out-wall-st-dares-to-celebrate/?hp
    I think we will try the Don B method of helping out by booking a trip to Ireland. But, you know, this porno scanner vs body grope dilemma is a really sticking point.

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  8. Scoremore says:

    I think the government should resign now even before
    the budget is passed.
    Let the people vote.
    Reduction of basic wage? They unemployed will love
    that they are finding it very hard to make ends meet
    at present. The question is though is how long will
    it take for the basic prices to drop (incl coal).

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  9. sanitychecker says:

    DonB: The euro was meant to be at parity with the dollar and currently it soars above it. If the euro could collapse, they’d be jumping for joy across the pond. The ECB does not do QE or pegging. Many in Europe wish they would.

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  10. sanitychecker says:

    Why is the NYT still hiring Tom Friedman? The guy’s been wrong about everything. Nothing succeeds like failure. Friedman is living proof of it.
    Along with him, it’d be nice to see a few bankers tarred and feathered.

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  11. Don Bacon says:

    Thank you, Sean Kay, excellent overview, really good. Apparently the government bank guarantees also spread to the UK and then to Germany, although at lesser rates, thus spreading the calamity. Portugal may be next, and then the big dog — Spain. Problems. (Chalmers Johnson might not be so high on the euro now.)
    From the Irish Independent’s James Downey: “‘Bertie’s Rocket’ crashes to earth with an almighty bump” I wonder what Bertie Ahern, Taoiseach (prime minister) of Ireland from 26 June 1997 to 7 May 2008, has to say now.
    Well, we know. In an November 2009 interview with VIP magazine, Ahern spoke of how critics blame the Government for the economic crisis should

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  12. DakotabornKansan says:
  13. Dan Kervick says:

    “We’re going to be just fine.”
    We??? What, is Bill Clinton running for President of Ireland now that he has run out of terms in the United States?
    Seriously, though, isn’t it terribly obvious by now what happens in an poorly regulated financial environment? What happens is human nature. Acquisitiveness, wide-eyed desire, short-term impulses leading to excessive debt, the pressures of leveraging leading to an even shorter-term view, the attraction of predators to the financial frenzy, and ultimately a wild ride of speculative and Ponzi lending all operating within the libertine standards of an unwise regime of laissez faire legal legitimacy.
    If we want individual people to behave in ways that add up to a pattern that is collectively healthy for the commonwealth over the long-term, then we need some actual laws that mandate and more strongly incentivize the appropriate long-term and stable strategies.

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