From boom to bust in Ireland

January 7, 2011

Eric Toussaint, author of Your Money or Your Life: The Tyranny of Global Finance, analyzes the rise and fall of the Celtic Tiger economy in Ireland.

FOR A decade, Ireland was heralded by the most ardent partisans of neoliberal capitalism as a model to be imitated. The Celtic Tiger had a higher growth rate than the European average. Tax rate on companies had been reduced to 12.5%[1], and the rate actually paid by transnational corporations that had set up business there was between 3 and 4 percent--a CEOs dream!

Ireland's budget deficit was nil in 2007, as was its unemployment rate in 2008. In this earthly paradise, everybody seemed to benefit. Workers had jobs (though often highly precarious); their families were busy consuming, benefiting as they were from the prevailing abundance; and both local and foreign capitalists were enjoying inordinate returns.

In October 2008, a couple of days before the Belgian government bailed out the big "Belgian" banks Fortis and Dexia with taxpayers' money, Bruno Colmant, head of the Brussels stock exchange and professor of economics, published an op-ed in Le Soir, the French-language daily newspaper of record, stating that Belgium must follow the Irish example and further deregulate its financial system. According to Colmant, Belgium needed to change its legal and institutional framework so as to become a platform for international capital, just like Ireland.

Tens of thousands march in Dublin against proposed cuts as a consequence of the EU-IMF "rescue" plan
Tens of thousands march in Dublin against proposed cuts as a consequence of the EU-IMF "rescue" plan (William Murphy)

A few short weeks later, the Celtic Tiger was crying for mercy when the economic crisis hit.

In Ireland, financial deregulation triggered a boom in loans to households (household indebtedness had reached 190 percent of gross domestic product on the eve of the crisis), particularly in real estate, a factor that helped boost the island's economy (the building industry, financial activities, etc.).

The banking sector had experienced exponential growth with the establishment of many foreign companies[2] and the increase in Irish banks' assets. Real estate and stock market bubbles started forming. The total amount of stock market capitalization, bond issues and bank assets was 14 times bigger than the country's GDP.

What could not possibly happen in such a fairy-tale world then happened: In September-October 2008, the house of cards collapsed, and the real estate and financial bubbles burst. Companies closed down or left the country, and unemployment rose to 14 percent in early 2010. The number of families unable to repay their creditors swiftly increased, too.

The whole Irish banking system teetered on the edge of bankruptcy and a panic-stricken government blindly guaranteed bank deposits for 480 billion euros (roughly $625 billion, and about three times the Irish GDP of 168 billion euros). The Irish government nationalized Allied Irish Bank, the main source of financing for real estate loans, with a transfusion of 48.5 billion euros--about 30 perent of GDP.

Exports slowed down. State revenues declined. The budget deficit rose from 14 percent of GDP in 2009 to 32 percent in 2010 (more than half of this due to the massive support given to the banks: 46 billion euros in equity and 31 billion euros for purchases of toxic assets).


AT THE end of 2010, the European bailout plan with International Monetary Fund (IMF) participation amounted to 85 billion euros in loans (including 22.5 billion euros from the IMF), and it is already clear that this won't be enough.

In exchange, radical conditions were forced on the Celtic Tiger in the form of a drastic austerity plan that heavily affects households' purchasing power, with a resultant decrease in consumption, in public expenditure on welfare, in civil servants' salaries, in infrastructure investments (to facilitate debt repayment) and in tax revenues.

On the social level, the principal measures of the austerity plan are nothing short of disastrous:

Elimination of 24,750 positions in the civil service (8 percent of the workforce, which would mean 350,000 positions in France);

New employees will earn 10% less;

Reduction of social transfers resulting in lower family and unemployment allowances, a significant reduction in the health budget and a freeze on retirement pensions;

A rise in taxes to be borne mostly by the majority of the population, already a victim of the crisis: notably, a value-added tax increase from 21 percent to 23 percent in 2014; the creation of a real estate tax (affecting half of the households that were formerly tax-exempt);

A reduction in the minimum hourly wage (from 8.65 euros to 7.65 euros, or 11 percent less).

The interest rates for the loans to Ireland are very high--5.7 percent for the IMF loan and 6.05 percent for the "EU" loans. These loans will be used to repay banks and other financial bodies that buy bonds on the Irish debt, borrowing money from the European Central Bank at a rate of 1 percent--another windfall for private financiers.

According to AFP, IMF Managing Director Dominique Strauss-Kahn claimed that the bailout would work, though, of course, "it would be difficult because it is hard for people who will have to make sacrifices for the sake of budget austerity."

Both in the streets and in parliament, opposition has been determined. The Dail, or lower house of parliament, voted through the 85 billion euro rescue plan by a mere 81-75 margin.

Far from relinquishing its neoliberal orientation, the IMF declared that among Ireland's priorities, it is counting on the adoption of reforms to do away with structural obstacles to business, so as to support competitiveness in the coming years.

The "socialist" Dominique Strauss-Kahn said he was convinced that a new government after the elections in early 2011 would not change anything. "I'm confident that even if the opposition parties, Fine Gael and Labour, are criticizing the government and the programme...they understand the need to implement the program," Strauss-Kahn said.

In short, the economic and financial liberalization aimed at attracting foreign investments and transnational financial companies has utterly failed. To add insult to the injury that the population must bear as a result of these policies, the IMF and the Irish government are persevering in the neoliberal orientation of the past two decades, and, under pressure from international finance, are subjecting the population to a structural adjustment programs similar to those imposed on Third World countries for the past three decades.

Yet these past decades should show why such programs are a disaster--and why it is high time to enforce a radically different logic that benefits people and not private money.

Translated by Christine Pagnoulle in collaboration with Judith Harris.


Notes

The present article is largely drawn from a slide show by Pascal Franchet ("Actualité de la dette publique au Nord").

1. The tax rate on company profits is 39.5 percent in Japan, 39.2 percent in the UK, 34.4 percent in France and 28 percent in the U.S.

2. The problems experienced by Hypo Reale Estate in Germany (bailed out by Angela Merckel's government in 2007) and the collapse of the U.S. investment bank Bear Sterns (bought out by JPMorgan Chase with the help of the Bush administration in March 2008) were partly due to dodgy hedge funds located in Dublin.

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