Ireland: What’s gone on over Eire?

Andrew Pegler – 3 December 2010

How did Ireland suddenly go from the Celtic tiger to the Celtic basket case?

It grew too fast

During the 1990s to early 2000s Ireland went from being the poor man of the EU franchise to one of its richest. Before then it was a bit of a joke. In fact there was an industry around Irish jokes (“Did you hear about the Irish banana business that went broke because they threw out all the bent ones?) But then it embarked on a reform program to attract foreign cashola and lowered company tax to 12.5% and “loosened” industrial policies. And it worked. Microsoft relocated there and a few other big players made sizeable investments. In addition it had joined the EMU in the late 90s giving it access to European capital markets, not just Ireland, and rewarding it with very low mortgage rates. GDP was averaging around 8%, everyone had well-paid, high-tech jobs, and low interest rates fired up an inevitable construction boom. The Guinness was on the “Celtic Tiger” and prosperity was in the Éire.

The familiar story of credit being too easy

The aforementioned low interest rates saw the public borrow and spend beyond their means and the banks lend to people they should not have. Meanwhile the government didn’t do things it should have like raise tax rates or better regulate credit. And with its banks up to their necks in the housing boom, when that went bad they fell over.

Its economy was too specialised

Ireland was precariously dependent on international investment, banking and construction, all of which had already started to take their bats and balls and gone home when the GFC slammed the place, bursting its real estate bubble, busting its banks and sending the economy to the dogs. The unluck of the Irish.

The AUD$114 billion or so bailout package by the (European) Commission and the IMF, in liaison with the ECB (European Central Bank), has been a pragmatic response to the threat of contagion. Ireland’s largest creditors are Germany and the UK and an Irish bank default would have damaged those banking systems at a time when they didn’t need it.

The big take-away for Australia lies in the perils of a specialised economy. Right now we’re knee deep in resources boom mark II but what are we going to do when the music stops? We ought to be ploughing government revenue into subsidising innovation in our manufacturing and tourism sectors which, after years of a high AUD and the flood of investment into mining, will have withered into something unrecognisable. Guinness anyone?