Three years ago, Ireland was still presented as an economic miracle well founded on the neo-liberal policies of low corporate taxation and lax banking regulation. Today, the miracle is in shambles. Relatively high growth rates had been grounded. Comment by Joachim Becker
Fuelled by escalating debt, the real estate sector expanded rapidly and housing prices climbed up at an equally neck-breaking pace. Irish banks relied on huge inflows of capital and charted out credits in a careless manner. While the public debt was relatively low, the private debt reached record heights.
* Overexpansion of the financial sector
The global crisis which started in the US and the UK laid bare the dubious foundations of the Irish miracle and imploded the financial bubble. After the crash of Lehman Brothers in the USA, the Irish government panicked and declared a sweeping guarantee for all deposits and senior debts of banks at the end of September 2008. Ailing banks were completely or partially nationalised. Their losses were socialised and are to be paid by the tax payers.
Meanwhile the extent of the losses becomes clearer by the day. Due to the rescue packages for the banks, the public deficit is estimated to reach 32% of the GDP this year. Ireland has the most rapidly rising public debt in the EU. However, the escalating public debt has its roots in the past overexpansion of the financial sector and an excessive private debt, including household debt.
The government which is intimately linked to the financial sector has reacted by adopting very severe austerity policies, including a 15% cut of public sector salaries. The medicine does not cure the ills, but aggravates them. The Irish economy is shrinking. Unemployment is growing rapidly. Thus, the debt burden becomes more and more heavy. Private debtors have more and more troubles to service their debt. Irish banks face severe problems to re-finance their debts. They are increasingly reliant on credit lines of the European Central Bank.
* More severe than Greece
The economic crisis is more severe in Ireland than in Greece. The overall debt burden in Ireland is considerably higher than in Greece because of the enormous private debts. The key sectors of Irish growth – the finance and real estate sectors – are sinking in a sea of debt. Greece already applied for EU support that was conceded after long hesitations and with heavy conditions. Now, the German and some other EU governments pressurise Ireland to apply for EU support because their banks are heavily exposed in Ireland and in Southern Europe and they fear a contagion effect.
Irish banks, companies, public institutions and other debtors owe $139bn to German banks and $149bn to British banks. De facto, a rescue package for Ireland is a rescue package for foreign banks. Such a rescue package would be linked to stringent conditions in fiscal policies. Irish policy space would be reduced to zero. This is one of the reasons why the Irish government was hesitating to apply for the funds. The second reason is that it is even more likely to lose looming early elections in case of openly admitting the total failure of its economic policies. Political crisis might follow economic crisis.
Ireland needs support. However, a support package would need to help Ireland out of the recession instead of deepening it. In addition, it seems that a reduction of the excessive private debt is a necessity. This would imply that foreign banks take a share in the losses.
Joachim Becker is a Professor at the Economic University of Vienna.
Posted: 23 Nov 2010
Recommended citation: Joachim Becker (2010) 'Ireland: The implosion of a miracle', World Economy & Development In Brief, 23 Nov 2010, Luxembourg (www.wdev.eu)
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