Celtic troubles
February 16, 2010
The economy of the Republic of Ireland, until the early 1990s, was rooted firmly in agriculture, largely relying on traditional, farm-based businesses. But in 1994, Ireland began to experience economic growth that would transform one of Europe's poorest nations into one of its richest.
Starting that year, Ireland used its educated and under utilized English-speaking workforce, state policies that attracted large American corporations eager to make inroads into the European Union market, tolerance towards low-skilled immigrant workers and generous corporate tax benefits to fuel expansive economic growth.
Property prices soared as wages increased. Personal and public debt levels decreased dramatically. The 'Celtic tiger', as Ireland came to be known, became a knowledge-based economy.
The 2007 global downturn ended Ireland's positive run, and the crisis of 2008 sent the country into an economic tailspin. The government could no longer continue wage increases necessary for workers to pay high home prices, leading to widespread mortgage defaults.
Ireland's housing losses were devastating; its real estate bubble had grown much faster than that in the rest of Europe. Debt levels, at historical lows in 2006, returned to unmanageable levels. Many of the gains made during the Celtic tiger's boom period have been lost in the last three years. It could take decades to restore them.
2010 forecasts discouraging
Few economists believe Ireland will recover this year. An official forecast released by the Irish government last month predicted an average unemployment rate of 13.2 percent in 2010.
The latest quarterly report from Dublin-based Economic and Social Research Institute (ESRI) estimates an average jobless rate of 13.75 percent this year. Although much higher than European average, this is a significant downward revision from the institute's Spring 2009 forecast, which put unemployment at almost 17 percent by the end of 2010.
Like Greece, Spain and Portugal, Ireland's biggest problem is debt. Tax revenue declines of 20 percent last year have left Ireland operating 25 billion euros over budget this year.
Meanwhile, homeowners still are forced to pay expensive mortgages on property which has lost significant value. Home prices fell nearly 20 percent last year, according to ESRI, and are down more than 30 percent since 2007.
"It is just tragic when you look at the reversal in debt levels," Erik Jones, a professor of European Studies at Johns Hopkins School of Advanced International Studies, told Deutsche Welle.
"They worked so hard for so long just to be back where they were (when the economic revival began in the 1990s)."
The road forward
The European Union is not expected to allow Ireland's fiscal problems to become unmanageable. The European Commission last week made clear that while current action would be limited, Greece would not be allowed to fail. The same promise applies to Ireland.
The Irish government has helped itself by acting with more fiscal discipline than its Greek counterpart. Dublin has made sizeable spending cuts in this year's budget, and public workers, from low level bureaucrats to top public officials, are expected to earn less this year.
Philip Lane, a professor of international microeconomics at Trinity College Dublin attributed Ireland's ability to make difficult cuts to the nature of the Irish crisis. "Ireland is feeling the pinch because of the burst of the real estate bubble," he said. "Greece, meanwhile, has chronically overspent for years."
"We made the cutbacks in Ireland because we knew that wages were growing too quickly, that wages were too high," Lane told Deutsche Welle. "We knew we needed to get sensible again."
Lane says that once the crisis passes, Ireland should revert to the practices that made the early part of the Celtic tiger years successful.
"The real Celtic tiger was driven by an export boom. We got diverted by a domestic construction bubble," he said. "We need to get back to international business."
Author: David Francis
Editor: R. Balasubramanyam