C101117larifier

The past few days the Irish government has been in fervent denial over persistent rumours that the European Union and the International Monetary Fund are about to bail out the county from its biggest economic crisis since the 1950s.  Its European neighbours, too, are pressuring it to seek aid while the government remains adamant that a bailout is out of the question. How did Ireland reach such desperate times and is there a way out?

How did Ireland reach this point?

There are many reasons that the Republic of Ireland is now facing the humiliating prospect of turning to the IMF and EU for aid. Due in part to low tax rates, aid from the EU and favourable industrial policies, Ireland experienced a boom during the 1990s, transforming from a country with one of the lowest living standards in the EU to becoming one of its wealthiest members.

The boom was built on foreign investment and successfully luring tech companies such as Microsoft to relocate. Between 1995 and 2000, annual GDP growth averaged between 6% and 11%, earning Ireland the nickname the Celtic Tiger. Unemployment decreased sharply, and low interest rates fuelled a simultaneous construction boom.

Post-9/11, Ireland like most of the world experienced an economic downturn. While there were signs of recovery, the decline in the global IT industry meant that Ireland was unable to sustain anything above sluggish levels of economic growth through the 2000s. Things took a dramatic turn in 2009 when the real estate bubble burst, the banks went bust and the economy was sent into meltdown.

So whose fault is it?

The Irish have been quick to point fingers at everyone from the EU to the banks. While at first glance it is obvious that the Fianna Fáil government is responsible, it is also clear that the Irish banks and public have been guilty of treating the 90s boom recklessly.  Low interest rates combined with careless lending by the banks meant that the Irish were borrowing and spending well above their means.

The government proved unable to produce economic policy that would have sustained the boom as well as prepared for the eventual downturn. Former Taoiseach Bertie Ahern went as far as claiming during the early 2000s downturn that the boom was still continuing. His government failed to take any precautionary measures such as raising tax rates or regulating borrowing and spending. This short-sightedness meant that Ireland was overly dependent on the banking, construction and property sectors, all of which have collapsed over the past 18 months.

Banks have become an expensive thorn in the side of the government; it has been estimated that saving the banking sector would cost about €50 billion, equivalent to a third of GDP. In September after the Anglo-Irish Bank suffered one of the biggest losses in Irish corporate history: the Central Bank of Ireland estimated that a bailout could ultimately cost €34.9 billion. It is also apparent that the Bank of Ireland and the Allied Irish Bank may also require additional funds.

Ahern’s successor, Brian Cowen, has now been forced to turn to a “slash and burn” approach. Fortunately for him, differences on economics between the two major parties, Fianna Fáil and Fine Gael, are minimal, with neither of them having what resembles a consistent approach to economic policy.  Government and opposition have reached an agreement that will see a new program of tax increases and spending cuts introduced to save €15 billion within the next four years — a program that could have helped enormously four years ago.

So is Ireland the “new” Greece?

Not really. While it is likely that Ireland will have to receive a bailout, they are still yet to make an official request for aid to the EU and IMF. The days of the Celtic Tiger may be behind them but the Irish can take solace in the fact that they are in a relatively better position than the Greeks were.

Greece was forced to ask for aid from the EU in May when it needed immediate access to cash to pay off investors. Ireland on the other hand, at least according to the government, still has enough money to keep the country afloat for the time being.  Despite rumours continually surfacing of emergency talks with the EU, the official word from Dublin is that Ireland has the ability to “self-help” itself out of the current crisis without any external intervention.

What’s going to happen?

Despite the protests of Cowen, it is becoming increasingly clear that some form of intervention is inevitable. Over the weekend, speculation emerged that Ireland is potentially just days away from EU or IMF intervention. The Guardian estimated that about 150,000 young people will emigrate within the next five years and currently the unemployment rate stands at 13.9%.

The markets have also turned against the Irish with the current rate of borrowing costs (9%) being higher for Ireland than they were for Greece earlier this year.  Ireland’s neighbours are concerned that further delay will spread the economic contagion to weaker Eurozone counties such as Portugal and Spain, and are pressuring Ireland to seek help.

It is never easy for a government to turn to external aid, but Fianna Fáil owes it to the Irish public after failing to provide a vision for Ireland that faced up to the realities of a post-boom economy. Ireland may never return to being the Celtic Tiger but its recovery is wholly dependent on whether the government is finally prepared to face reality and accept a bailout within the next few weeks.