The Irish people go to the polls on February 25.
The governing Fianna Fail party — that created the fallen Celtic Tiger economic model and is now the object of widespread public outrage — will almost certainly be banished to political wilderness, much like the conservative regime casualties of economic crisis in Greece and Iceland.
The Celtic Tiger went from boom to bust with breathtaking speed. In the wake of (in part because of) four austerity budgets—seen as the toughest in Europe– Ireland is locked in depression with ten successive quarters of economic contraction.
Over the last three years, Ireland has seen its national income plummet by over 17%–the deepest and most rapid collapse of any Western country since the Great Depression. Unemployment by some measures now exceeds 20%.
Until its collapse, the Irish model was widely seen as the poster child of successful development in a globalized era. The darling of conservative policymakers and think tanks, the Heritage Foundation declared Ireland the third most “economically free” country in the world after Hong Kong and Singapore in 2008.
A key pillar of the Irish model was its ultra-low 12.5% corporate tax rate to entice high tech multinational corporations to set up bases in Ireland from which to export into the vast European market.
The Irish model produced a stunning record of economic growth that dramatically reduced unemployment and reversed the historic outflow of Irish labour, and on paper, converted Ireland from Europe’s poor cousin to one of Europe’s richest members.
Foreign direct investment—led by the computer and pharmaceutical sectors–poured in. It became the preferred location of (mainly US) multinational corporations seeking to keep their profits out of reach of their home country tax authorities.
The most recent phase of the Irish “miracle” was built on a tsunami-like surge of reckless lending by a loosely regulated banking sector to property developers and homebuyers. They drew on unlimited funds borrowed from willing European and U.S. banks at interest rates cut in half by its membership in the European Monetary Union, and spurred on by government subsidies.
A cozy cabal of politicians, bankers and property developers produced an orgy of speculation, which drove a monstrously unsustainable construction boom and real estate bubble.
When the global crisis hit, the bubble burst. Foreign finance dried up, exports tanked, construction came to a halt and property values plunged, exposing the toxic debt at the heart of the Irish banks. Ireland’s budget surplus and low public debt turned bad with lightening speed.
It became increasingly clear during the fall of 2010, that the Irish state had sealed its own financial fate by bailing out its banks. With public debt at a crushing 130% of GDP, Ireland was now at the mercy of the European Central bank.
In late November, the government basically handed control over to the ECB and International Monetary Fund, concluding a massive $110 billion “rescue” package, likened by some to the post-World War I German reparations accord.
It imposed no loss on foreign creditors (mainly European and US banks). And the punitive 5.8% interest rates will force Ireland to transfer the equivalent 7% of its national income to foreign creditors for years to come.
The Irish think tank TASC reflected the view of many in its assessment of the EU-IMF agreement: “The deal is inequitable, won’t work and will either lead to a sovereign default or will condemn the Irish people to a prolonged period of economic stagnation.”
In early December, the government implemented the IMF-EU directive with its most extreme austerity budget since the crisis began. The budget’s cumulative spending cuts and tax hikes amount to an astonishing 18% of GDP; or put in a US context, would be equivalent to a $2.7 trillion adjustment. As it stands, it condemns the country to years of economic stagnation and untold hardship, and accelerates the exodus of youth in search of jobs abroad.
The IMF-ECB agreement, as it stands, will almost certainly be unacceptable to the new government.
Clearly the Irish model was deeply flawed and vulnerable to collapse, as events have shown.
Its dynamism was highly dependent on foreign capital and strong export demand. Linkages from the foreign sector to indigenous industry were limited. The rapid accumulation of wealth during the boom years either flowed out of the country or, to the extent that it remained, benefited a small minority. Resources were not used to strengthen public services and distribute income widely. Cuts to personal income and capital gains taxes left the government coffers with a narrower tax base highly dependent on property taxes.
In future, policymakers who insist on extolling the virtues of the now extinct Celtic Tiger will require more than a touch of blarney.
Bruce Campbell is the Executive Director of the Canadian Centre for Policy Alternatives.