Amid the euphoria surrounding Ireland’s removal from junk credit rating status, it’s easy to get swept along by the consensus tide of opinion that the Emerald Isle is the “poster child” for euro zone austerity.
But were another country to find itself in Ireland’s unfortunate financial predicament now, few would suggest it follow the path Dublin took.
The Irish government assumed the entire nation’s private banking sector debt in 2008 after then finance minister Brian Lenihan explicitly guaranteed all bank debt in the country. It was hailed as a masterstroke at the time, but in an instant Ireland’s hands were tied and its options all but evaporated. Even the stuff that posed no systemic risk was put on the government’s – the taxpayers’ – books. This prevented the collapse of the financial system, but at a price: the country’s sovereign debt load almost doubled to around 100% of annual economic output, and in order to do that it was forced to take an €85 billion bailout from international creditors two years later.
Ireland has come through the other side. But for an open, flexible economy with attractive tax environment on the doorstep of a much larger economy in the UK, it could be argued that was never in doubt. The question is, at what cost.
By many measures, the economic cost has been high, as the following two charts show: