Ireland’s €85bn financial bailout by the IMF and EU on 22nd November was a gift for newspaper sub-editors. The Celtic Tiger had been declawed, they said; had its roar silenced; lost its stripes; had its tail pulled; become extinct – anything to avoid using the word ‘economy’, anathema to a snappy headline. Perhaps in a bid to sidestep tigrine metaphor, the Irish Daily Star chose a different tack, simply running a picture of the Taoiseach and colleagues with the words “USELESS GOBSHITES” below.
But while the Star’s front page was in keeping with the feelings of many in Ireland towards leaders who, they felt, had led to the country’s ruin, it wasn’t entirely fair. In the veterinarian whodunnit of Who Killed the Celtic Tiger, the Star (and many other papers) were on the wrong trail. For it wasn’t primarily governmental error that had led to the
signing of the big cat’s death certificate, but private excess.
The tiger rises
The banker who coined the term ‘Celtic Tiger’ back in the 90s should have realised it was like christening a hang-glider “Icarus” – the original Asian “Tigers” were brought low in their region’s financial crisis at the end of the 90s. But for years and years the dream held. Ireland was the poster boy of modern economic management, moving from a debt-to-GDP ratio of 130 percent in the early 80s (which saw it ranked with third-world economies) and unemployment of above 18 percent to having one of the highest employment rates in Europe and, in 2005, the second-highest GDP per capita in Europe (after Luxembourg). It made six percent year-on-year growth look like child’s play. “The poorest of the rich”, The Economist had dubbed Ireland in 1988, but ten years later the publication gushed that it was “Europe’s shining light”.
From the mid-nineties Ireland was converted from the agrarian sticks into a major technological hub, cashing in on a fairly cheap, educated workforce and low taxes. Ireland had a corporation tax of between 10 and 12.5 percent throughout the late nineties, making it a magnet for companies such as Microsoft, Google and Pfizer. The centuries-old trend of Irish emigration was reversed and, as would be expected, property values grew healthily.
A little too healthily, as it turned out. For a primary reason for the undoing of the Irish economy was its overvaluation of property, which took a painful tumble in September 2008 when the global credit crisis hit. And as property prices had increased, so had the country’s banking sector. Anglo Irish’s assets, for instance, grew more than 50-fold between 1993 and 2007, in which year more than 80 percent of its loans were to construction companies and property developers. When the fall came, Anglo Irish and other banks in Ireland found themselves too heavily exposed to mortgages and construction loans.
Ireland and Iceland
The quip that “the only difference between Ireland and Iceland is one letter” is overly facile. But it’s certainly true that the two countries both foolishly allowed banks to become too major a part of their economies.
There are fewer people living in Iceland than in Croydon, and when a country has bank assets of several times its GDP (the three banks nationalised by Iceland had assets over 11 times greater than GDP in 2008, according to my calculations) you’ve got problems. People can shift their money and, if you’re unlucky, they may all want to do it at the same time.
The problem with Iceland was that the country was simply too small to save the banks. It didn’t have the cash to stump up and had to tell investors “tough luck”, leading to a horrible recession and a crippled stock market. The debt just couldn’t be paid: imagine, if you will, those residents of Croydon having a whip-round for $50 billion. It just wasn’t possible.
“For years Ireland was the poster boy of modern economic management”
Conversely, the problem with Ireland was that the country could save the banks. Indeed, when it did so in 2008 it prompted the UK to extend guarantees as well and got the ball rolling for the US government to do the same. But, at some £39 billion (about a third of its GDP this year) it was a costly exercise. And that exercise,
in turn, ended up wrecking the country.
What could the “gobshites” have done?
Economics 101: Growth is good. Economics 102: Too much growth is bad. Ireland failed to curb growth (or at least certain measures of it, notably property values) and became overheated. Had Ireland had an independent currency rather than the Euro it could have used classical monetary policy to keep things in check — when inflation rises,
a sign of economic growth, raise rates, which dampens activity. That way you don’t get bubbles.
But Ireland didn’t have the luxury of setting its own rates, as that was done by the European Central Bank. And in retrospect, Ireland looked at inflation inaccurately, or at least inappropriately. Normally, inflation is viewed as the rise in price of a basket of household items, and doesn’t take into account the value of property. When the value of those household items rise, inflation rises. But if you don’t have the price of houses factored in, a country may experience rapid growth (through property values) that isn’t reflected in inflation. So an economy can be overheating, but if that heat is through property prices the warning bells will not ring.
Yet even if economic growth is screamingly apparent, nobody wants to be a kill-joy. And every government wants people to become richer. Rising house prices may keep youngsters off the housing ladder but, in terms of overall public opinion, they are a Good Thing. Never mind if the growth is based on unrealistic expectations: if a constituent’s house price rises that’s grand. It takes an extraordinarily bold government to put the brakes on economic growth. And that’s because the slogan “Vote for us and experience mediocre performance, but we’re in it for the long run” doesn’t go down too well.
The obvious thing was that the government could have raised taxes, although once things were headed south that wouldn’t have made sense. They could also have legislated more on how banks lent – they could have varied banks’ reserve ratios (as is done in China or Turkey) so that institutions simply weren’t allowed to let their loan books grow in an uncontrolled way, giving out loans for more holiday homes and golf courses than were feasible. If the state failed, then, it was in not reining in the private sector rather than any actual sins of commission. It didn’t cause, yet did not stop, the train crash. Unlike Greece, with its huge public sector spending, the grey suits in the Irish Treasury had not got the decimal point in the wrong place when working out pension liabilities. The various governments of the Celtic Tiger kept their books in order: there was never an unusually high budget deficit, the government didn’t act profligately and it didn’t get its maths wrong. It did, though, allow a lot of its citizens to.
And this is the nub of the question. For whereas in the 1980s, private-sector debt was about 50 percent of GDP, it’s now about 200 percent (whereas the state’s has fallen over that time, even with the massive take-on of bank debt). It was the gung-ho lending of the banks and the reckless enthusiasm for construction projects that killed the Celtic Tiger. Had the Star’s editor not been interested in generating sales, he might have accompanied the paper’s headline with an arrow pointing outwards to some of his readers.
Maybe safest, though, just to put: “Economy gets €85bn bailout”, along with a photo of a high street…
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