From Celtic Tiger to road kill: Ireland’s rapid economic descent
How the mighty have fallen. When I lived in Ireland five years ago, the country had a spring in its step. Its property magnates were snapping up prime real estate in central London, or paying eye watering sums for prestigious sites in crowded Dublin. Their banks were some of the top-rated in Europe, busily acquiring businesses in the United States and eastern Europe. High-end housing estates mushroomed, a gleaming new tram system was installed, and the finance district buzzed and hummed with industry as international businesses flocked to a country they praised for its low taxes and well-educated workforce.
Of course, the warning signs were there. House prices were ridiculously inflated (I wrote back in 2006 that less than a fifth of houses for sale in Dublin were on offer below 317,500 euros – the level at which property tax kicked in for first time buyers). The economy was highly exposed to its banking sector and to external shocks, as the central bank recognised at the time – although it saw the risks as limited : “While the strengthening of domestic demand puts the euro area in a better position than previously to withstand a U.S. slowdown, this challenge would intensify if the U.S. economic situation were to deteriorate sharply,” the Irish central bank said in October 2006. “This, however, still remains a risk scenario rather than the baseline one.”
Anglo Irish bank – the disgraced lender that will cost the Irish government up to 34 billion euros to bail out – was a shining star of the country’s banking system. “We’re confident about the future,” Anglo Irish’s then-group finance director, Willie McAteer, told me in a phone interview in 2006. “When he had half a billion (euros in profit) in ’04 we talked about making a billion in five years’ time. I suppose now we’re looking forward really to 2010 to one and a half billion”.
The Irish finance minister during this period was one Brian Cowen, now the country’s Prime Minister who is fighting for his political life. Cowen’s parliamentary majority has been slashed to less than four in the lower chamber and his government is – unsurprisingly- deeply unpopular. The government has slashed public spending to pay for its ballooning deficit and help fund the bank rescue. Propping up the troubled lenders will lift the country’s deficit to 32 pct of GDP, with the underlying deficit to GDP at 12 percent. That’s among the highest of all advanced economies globally.
Hardly surprising, then, that recent opinion polls suggest a new coalition of centre-right Fine Gael and centre-left Labour will sweep to power in elections due in 2012 at the latest. What more that alliance could do to salve the pain for Ireland, though, is unclear. Many of the glamorous housing estates I marvelled at on my way to work each morning (largely wondering how anyone could afford to live in them) now stand empty: Ireland – with a population of 4 million – has 300,000 unsold or unfinished houses. Official unemployment stands at nearly 14 percent. True unemployment is thought to be closer to 20 percent.
The way out will be long and painful: it’s a path Ireland trod at the end of the last century and few who enjoyed the benefits of that growth in the early noughties thought they’d be back here again so soon.
But it’s also possible that the overly optimistic view of Ireland seen a few years ago is currently being matched by an overly pessimistic view of the future. As my colleague Peter Thal Larsen of Reuters Breakingviews points out, delivering a credible four-year budget plan later this year is crucial. Ireland may be down, but it’s not yet out.