Good old Ireland—according to the leaders of France and Germany, things would be a lot better in Europe if all the countries were like Ireland. Their reason: the Irish have generally accepted their austerity “medicine” quietly while workers in other countries (like Greece and Spain) have been in the streets protesting.
The problem with being the “good” country is that while austerity helps ensure that the Irish government is able to make payments to the country’s international investors (especially French and German banks), the Irish people are suffering and their economy is close to sinking back into a new recession. Some deal.
Not so long ago Ireland was known as the Celtic Tiger. Ireland’s recent economic rise, which began in the 1990s, was fueled by multinational corporate investment, much of it from US high-tech firms. As Andy Storey explains:
Ireland, accounting for a mere 1% of Europe’s population, managed to attract 25% of all US greenfield investment into the EU in the early 1990s. US investment in Ireland, at $165 billion, is greater than US investment in Brazil, Russia, India and China combined. Multinationals, the majority of them from the US, account for 70% of Irish exports.
The attraction: Ireland’s extremely low tax rates and tariff-free access to the EU.
Unfortunately for Ireland, the 2001 collapse of the US high-tech bubble meant the end of US investment in the country. Ireland was “saved,” however, by a debt-driven housing boom. Sound familiar?
Irish banks were able to borrow cheaply thanks to the country’s 1999 adoption of the Euro. And with manufacturing in a slump, they aggressively and profitably pushed loans to Irish home buyers and builders. Storey highlights the importance of real estate activity to the Irish economy as follows:
Investment in buildings accounted for 5% of output in 1995 but for over 14% in 2008. By 2006/07, the construction industry was contributing 24% to Irish income (compared to the Western European average of 12%), accounting (directly and indirectly) for 19% of employment (including high levels of migrant labor) and for 18% of tax revenues (property transaction taxes have now collapsed as construction activity has nosedived).
Just like in the United States, this housing boom temporarily masked the fact that the country’s industrial base and public infrastructure was decaying, overall job growth was slowing, and household debt was soaring. When the global crisis hit in 2008, triggered by the collapse of the US housing market, it was the end for Irish growth as well. Irish banks lost access to foreign credit at the same time as their own real estate loans went bad. The Irish financial sector was on the ropes and unable to repay its creditors.
So, what did the Irish government do? In September 2008 it announced that it would guarantee all deposits and payments to foreign creditors. Thus, the people of Ireland found themselves taking on all the debts of the Irish financial sector. Not surprisingly, government debt as a share of GDP greatly increased.
The main beneficiaries of this policy were the country’s foreign lenders, including French and German banks. No wonder the French and German governments view Ireland as a good nation and role model for Europe. This history challenges the notion, widely pushed by the leaders of France and Germany, that the region’s crisis was caused by out-of-control government spending.
Of course, with low tax rates and an economy in recession the Irish government was in no position to pay the private debts it had taken over. The answer, supported by European elites, was austerity. The Irish government slashed spending on public sector projects and workers as well as social programs to free up funds. But even that was not enough. The Irish government had to borrow as well, an action that further increased the country’s national debt.
The foreign creditors got paid, all right. But the austerity only made things worse for Ireland. The cuts drove the economy deeper into recession, again driving down revenue, and forcing the government to seek new loans. However, foreign lenders could see the handwriting on the wall and were unwilling to substantially increase their lending to Ireland. Instead of renouncing or renegotiating the debts, the Irish government went to the IMF and EU for help. It was “rewarded” with a major loan of approximately $90 billion in December 2010, at the cost of yet more austerity involving higher sales taxes and sharply reduced spending on social programs.
And the consequences of this strategy for the Irish people? As the New York Times reports:
“This is still an insolvent economy,” said Constantin Gurdgiev, an economist and lecturer at Trinity College in Dublin. “Just because we’re playing a good-boy role and not making noises like the Greeks doesn’t mean Ireland is healthy.”
Ireland’s GDP fell by 3.5 percent in 2008, another 7 percent in 2009, and a further 0.4 percent in 2010. The economy grew 1.2 percent the first half of this year but even this weak expansion will likely be short-lived. According to the New York Times:
The Economic and Social Research Institute, based in Dublin, recently cut its 2012 growth forecasts for Ireland in half, to under 1 percent. It cited an expected recession in the wider euro zone, in part because the austerity being pressed on much of Europe by Germany and the European Central Bank is seen as worsening the prospects for recovery rather than improving them.
In fact, the Irish government announced in November that it will be forced to raise taxes and cut spending again in 2012. The reason: despite all its efforts the size of the national debt continues to growth. The budget deficit is projected to hit 10 percent of GDP this year, still sizeable even though down from 32 percent of GDP in 2010. The government fears that without drastic action it will be unable to continue paying its debts.
Perhaps not surprisingly, the Irish people are beginning to say “enough is enough.” The New York Times highlights one indicator of the change:
On a recent frosty night in Dublin, David Johnson, 38, an I.T. consultant, stepped outside a makeshift camp set up by the Occupy Dame Street movement in front of the Irish Central Bank. “This is all new to Ireland,” he said, pointing to tarpaulins and protest signs that urged the government to boot out the International Monetary Fund and require bondholders to share Irish banks’ losses that have largely been assumed by taxpayers. “The feeling is that the people who can least afford it are the ones shouldering the burden of this crisis.”
The December 3rd Spectacle of Defiance and Hope in Dublin, captured in the video below from Trade Union TV, is another.
The following charts published in the New York Times highlight some of the trends discussed above.
Ireland’s road to debt and austerity is illustrative of the general situation in Europe. Working people are being squeezed to protect profits and ensure the stability of existing economic relations. Significantly, the leaders of France and Germany have just announced their long term plan for ending Europe’s crisis: adoption of tough new limits on government borrowing. Clearly this is a desperate attempt to head off any meaningful challenge to the existing system. At some point, and one hopes sooner rather than later, working people throughout Europe will see through this game, recognize their common interests, and take up the difficult but necessary job of economic restructuring.