Ireland, stagnation, boom, bust and recovery

The Keynesians like to cite Ireland as a case study in the failure of economic rationalism and the austerity measures that have been advocated by non-Keyesians to handle the debt crisis.

The following text is taken from an email circulated by Nicholas Vardy “The Global Guru”. His thoughts can be found on his blog

The take-home lesson is that the boom was particularly spectacular and this provoked a frenzy of spending. Austerity came later, and it appears to be working. This looks like textbook Austrian boom and bust theory. Lets see how Ireland and the US perform over the next year or two.

From the Global Guru

For much of the 20th century, Ireland had been the country from the wrong side of the economic railroad tracks. In 1988, Britain’s Economist magazine predicted that Ireland was heading for catastrophe — stuck in a downward spiral of high unemployment, slow growth, high inflation, heavy taxation and crushing public debt. Yet within a decade, Ireland had transformed itself into the “Celtic Tiger” — a country from Old Europe that successfully combined Asia-style growth rates with low unemployment, inflation and taxes — and a public balance sheet that was the envy of tax-and-spend European welfare states. While Germany, France and Italy struggled with slow growth economies bordering on stagnation, Ireland had transformed itself from an economic also-ran into the European Union’s second-richest country.

Then the Irish story unraveled with remarkable swiftness. Ireland was the first country in the euro-zone to slide into recession in 2008, with its gross domestic product (GDP) declining more than 14% in two years by the end of 2009. Ireland also is an ongoing case study of what it means to pursue a path of austerity in response to economic crisis, in contrast to the relentless onslaught of Keynesian stimulus packages being implemented by governments ranging from the United States to China.

The Boom

During the boom, Ireland’s economic transformation ranked up there with the best of the Asian Tigers. Twenty years ago, Irish GDP per person was about two-thirds of the EU average. Between 1993 and 1998, Ireland’s GDP increased by 45%, with annual rates of growth approaching 10%. House prices soared as shopping malls appeared on the outskirts of Ireland’s newly vibrant cities. By 2003, Ireland’s GDP was a third higher than the EU average. Unemployment fell from 17% in 1987 to 4%. Government debt shrank from 112% of GDP to 33%.

Thanks to a low corporate tax rate of 12.5%, Ireland attracted a huge amount of foreign direct investment (FDI). At its peak, Ireland boasted 1,100 multinational companies, which exported goods worth some $60 billion, accounting for a whopping 87% of Ireland’s total exports. Nine of the world’s top ten drug companies operated in Ireland. One-third of all personal computers sold in Europe were manufactured in Ireland. Ireland also was the world’s biggest software exporter, ahead of the United States. Ireland had become a European country that Americans could relate to: English-speaking, entrepreneurial and successful.

The Bust

Thanks to a deadly cocktail of a world-beating property boom, combined with unrestrained government spending, the boom veered out of control. The price of an average house soared by more than 350% between 1997 and 2006. The price of an acre of un-zoned land rose from 5,000 to 35,000 euros in rural Ireland in seven years. Between 2004 and 2008, banks in Ireland issued $50 billion in mortgages — the equivalent of banks in a country the size of the United States issuing mortgages of $2.8 trillion.

Flush with cash, the government went on a spending binge. From 1997 to 2008, investment in Ireland’s health service went up five-fold. Public-sector employment soared, even as pay doubled. Infrastructure projects were started across the country, but invariably completed spectacularly over budget.

The Irish economy unraveled with remarkable swiftness. Soaring labor costs forced Dell to pull up stakes and move 1,900 jobs to Poland. The collapse of the iconic Waterford Crystal brand quickly followed. Anglo Irish, the most aggressive lender of the past 20 years, was nationalized as property values halved. Tax revenues in 2008 were the worst on record as the economy collapsed. The government’s budget went from surpluses in 2006 and 2007 to a staggering deficit of 14.3% of its GDP last year – worse than Greece.

The Bitter Taste of Austerity Medicine

The Irish government’s response was both swift and harsh. Irish Premier Brian Cowen launched what many called the biggest assault ever seen on the public services of a modern Western state. The government raised taxes, even as it cut salaries in the public sector by up to 20%. But public finances are hardly flush. The government plans to reduce its deficit to less than 3% of GDP by the end of 2014. But for now, the OECD forecasts Ireland’s deficit at 11.7% of GDP in 2010 and 10.8% in 2011.

Ireland is a living, breathing test case of the austerity measures that are causing taxpayers and workers to take to the streets with pitchforks across the globe. Keynesian acolyte Paul Krugman argues that Ireland’s current woes offer a glimpse into the consequences of fiscal austerity in the United States. On its face, it’s a sad irony that rather than being rewarded for swallowing the bitter cod-liver oil medicine of austerity, Ireland is grouped right alongside the other PIGS — Portugal, Greece and Spain. The Irish government’s heroic efforts notwithstanding, Ireland still pays three percentage points more than Germany on its benchmark bonds.

Ireland’s downturn has been almost certainly sharper and its recovery has been delayed compared to what it would have been had its government gone on a U.S.-style spending spree. That said, Ireland’s economy already may have turned the corner. Ireland’s economy expanded for the first time in more than two years in the first quarter by 2.7%, and is expected to grow as much as 1.5% this year. This is an improvement over an earlier prediction of 0.5% and marks the first full-year expansion since 2007. Ireland’s unemployment rate today stands at 13.4%, the highest since September 1994. But this is substantially less than the 16% projected for 2010 last year. Overall, Ireland is quietly starting to outperform the most pessimistic projections.

While Keynesians like Krugman argue against the dangers of the United States becoming the “next Ireland,” the reality is that Ireland’s austerity efforts have kept it from becoming the “next Greece.” And the markets now seem to agree. While Ireland pays three percentage points more than Germany for its bonds, for Greece, that number is closer to seven percentage points higher.

Harvard economist Ken Rogoff, co-author of the bestseller “This Time Is Different.” points out: “If you want to escape default, the Irish path is the only way to go. But the Ireland experience points to the profound challenges that the current strategy implies.” The lesson? After a boom, the economic pied piper has got to be paid somehow.

And it’s better to pay him today than tomorrow.

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10 Responses to Ireland, stagnation, boom, bust and recovery

  1. jtfsoon


    stop hiding at Club Troppo.

    come over here and defend yourself

  2. JC


    He goes over there whining, whining about the Cat. He ought to realize that sort of beta like behavior only condemns him to even more feelings contempt; even by the people there.

  3. .

    A timely public service reminder from Ken Rogoff:

    “Let’s look at Stiglitzian prescriptions for helping a distressed emerging market debtor, the ideas you put forth as superior to existing practice. Governments typically come to the IMF for financial assistance when they are having trouble finding buyers for their debt and when the value of their money is falling. The Stiglitzian prescription is to raise the profile of fiscal deficits, that is, to issue more debt and to print more money. You seem to believe that if a distressed government issues more currency, its citizens will suddenly think it more valuable. You seem to believe that when investors are no longer willing to hold a government’s debt, all that needs to be done is to increase the supply and it will sell like hot cakes. We at the IMF—no, make that we on the Planet Earth—have considerable experience suggesting otherwise. We earthlings have found that when a country in fiscal distress tries to escape by printing more money, inflation rises, often uncontrollably. Uncontrolled inflation strangles growth, hurting the entire populace but, especially the indigent. The laws of economics may be different in your part of the gamma quadrant, but around here we find that when an almost bankrupt government fails to credibly constrain the time profile of its fiscal deficits, things generally get worse instead of better.”

  4. conrad

    “Thanks to a deadly cocktail of a world-beating property boom, combined with unrestrained government spending, the boom veered out of control. The price of an average house soared by more than 350% between 1997 and 2006.”

    Some people will find any old bizarro suggestion to explain away what amounted to bad governance. If you don’t want a booming propert marking, for example, it’s fairly easy to use taxes etc. to cool it down (even the Chinese government understands that). Some places even build enough appartments to keep up with supply, or use their own currency so they can keep interest rates at a decent level. As for whether the Irish government was overspending — this is a strange claim to make given that in the decade before 2006 they actually managed to pay a lot of their previous debt off, and the fact that a big reason they don’t have enough money now is because their reciepts have collapsed (hint, use a broader tax base or save money for hard days).

    It’s also hard to see why anyone would compare Ireland with the US (the country where half of it’s money goes down the drain on military equipment). Why not compare it with Denmark or some place like that, and not just on the “up” cycle?

  5. .

    “If you don’t want a booming propert marking, for example, it’s fairly easy to use taxes etc. to cool it down (even the Chinese government understands that).”

    People conflate booming prices with booming supply. Generally it ain’t so. Nor for Australia. Taxes have seen decadal declines in dwelling approvals. There is little incentive to invest and as demand grows, scarcity ensures appreciation. Loose monetary policy exacerabtes things by allowing uneconomic projects to be chosen, with the predictable consequences of a bust up.

  6. C.L.

    How come Northern Ireland isn’t a tiger?

    The protestant work ethic and all that.

  7. .

    C.L., –

    “As of December 2008 the public sector in Northern Ireland accounted for 30.8% of the total workforce. This is significantly higher than the overall UK figure of 19.5%, and also higher than Scotland, the next nearest region at 24%. Overall, the Northern Ireland figure has fallen. In 1992 the public sector accounted for 37% of the workforce. When measured relative to population, the gap between the Northern Ireland and UK figures reduces to three percentage points.[16]

    In total, the British government subvention totals £5,000m, or 20% of Northern Ireland’s economic output.[17] Many Unionists in Northern Ireland argue that a United Ireland could not sustain these levels of public sector employment, particularly as only 36% of the economy of the Republic of Ireland is contributed by government expenditure. Many in favour of a United Ireland argue that it is this dependence on the public sector that dissuades potential investors, causing Northern Ireland’s relative poverty.”

    Mr Cameron, tear this department down!

  8. jtfsoon

    Homer sez

    “I think a comparison with Poland is more appropriate.”

    Come back here and spell out your point Homes. And stop changing the goalposts.

  9. JC

    He won’t come back until he gets over the bitch slapping Sinkers gave him at Andrew N’s site. He’s too embarrassed.

  10. Taylor

    It will be interesting to follow this story, as Rafe said.

    The official stats, released on 30 June, showing the first quarter of growth for 2 years (2.7%) are here:

    Very early days, considering the long period of recession, but still a significant development.

    The Department of Finance subsequently published revised forecasts for 2010 on 7 July. Apparently growth of 1% is now possible. There is some good analysis of the data in there as well:

    Growth came from the export sector. Domestic investment and consumption has not recovered – probably due to the continuing debt burden. Looks like the Irish will need to export their way to growth, as there is obviously no increase in government spending.

    Ireland has a pretty small economy. Can a much larger economy like the UK export its way to growth at the same time, as well as Germany, as well as the US, as well as China, as well as the other developing countries? I think this is untested.

    There is also a good article from the Irish Times summarising the uptick in growth here:

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