The Irish screw up
Image by The Prime Minister's Office via Flickr...Ther eis much more.
Towards the end of the growth years, the country's financial sector descended into full-blown mania. Banks doled out credit indiscriminately and borrowed on international capital markets on a scale that far exceeded the nation's economic output. When the bubble burst, the government stepped in to rescue the banks, but their debts were ultimately bigger than the state's capacity to raise revenue. Ireland started sliding towards insolvency. Hence, the bailout.
Not all of the boom was bogus. The initial expansion was driven by growth in exports. A young, well-educated, cheap labour force attracted investment. So did an aggressively competitive 12.5% corporate tax rate. Ireland positioned itself as a lean, buccaneering start-up economy, challenging Europe's unwieldy giants. Membership of the single currency gave seamless access to export and capital markets.
But there was a shift at the start of the 21st century. As success fed into higher disposable incomes and demand for houses, the returns on property investment soared. The government, in turn, became dependent on tax revenues – and in some cases bribes – from the building trade. Politicians kept consumer demand buoyant with generous public spending, while rewarding developer friends with public works contracts. Ireland's narrow elite ran the economy like a casino and awarded itself free chips. No one, save a few lonely economists, had much incentive to call time on the party. By 2007, around one in five Irish jobs depended in some way on the property market.
Much of that story is familiar from other countries caught out by the credit crunch. But Ireland's unique misfortune is to have, in Brian Cowen's Fianna Fáil government, leaders who shipwrecked the economy and then capsized the lifeboats. The initial crisis response in 2008 was designed in such a way as effectively to absorb the doomed banking sector into the state, with no safeguards for taxpayers. While fitting as a kind of poetic commentary on what had happened in the boom years, as policy it was insane. Every cent of tax revenue disappeared down a black hole of debt; a ballooning budget deficit demanded brutal austerity measures – public sector cuts, tax rises – which drained any remaining cash out of the economy and prolonged recession.
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The government quickly found its resources were not unlimited. While the country is not in receivership it is at the mercy of the IMF and the EU which will require budget cuts and higher taxes. The Democrats seemed to be driving the US in that direction before the midterm election. Hopefully we can cut the spending and step back from the brink by also repealing the health care monstrosity.
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