by Frank Schnittger
Fri Feb 13th, 2009 at 11:51:49 AM EST
Cross posted from the European Journalism Centre Think about it Competition website (Shameless self-promotion - please comment on and rate post on the Think about it website if you have the time!)
Ireland has changed at a faster pace in the last 15 years than any other country in the world of which I have some experience. First we had the Celtic Tiger - over 10 years of uninterrupted economic growth of c. 6-8% P.A. resulting in a doubling of the Irish economy and workforce - over 10% of which consisted of recent immigrants from Eastern Europe.
That was followed by a financial and property bubble - rapidly increasing land, house and consumer prices and wage costs which rendered Ireland increasingly uncompetitive on world markets. In the days before the Euro the Irish Government could have controlled this by increasing interest rates and devaluing the Irish Pound. However with low Euro zone interest rates and an appreciating currency the boom continued on unabated with a populist Government throwing petrol on the flames by reducing tax rates when it should have been tightening fiscal policy to compensate for its lack of control over monetary policy.
from the diaries - Jérôme
The fall from grace has been a bit like the Wiley E. Coyote cartoon character who races over a cliff and only starts to fall when he realises he has been threading on thin air for some time. We might have gotten away with a minor recession had it not been for the unfortunate fact that our bubble burst just as the Global financial system was imploding.
Now we are seeing negative growth numbers never before seen in the history of the Irish State. Irish GDP is expected to decline by over 10% in the period 2008-2010. Unemployment will treble from 4 to 12% and that is even after many of the immigrants from eastern Europe have returned home. Consumer expenditure fell by 8% in the last quarter of 2008. House prices are expected to fall by 80% from peak to trough. House construction is expect to fall from a peak of 90,000 in 2007 to 23,000 in 2009. Inflation has actually turned negative (-0.1%) over the past year, and deflation is expected to rise to c. -4% in the current year.
This catastrophic crash is being led by the Irish financial sector. The Government has just approved a 7 Billion recapitalisation of the two major banks - AIB and Bank of Ireland - after it was forced to nationalise the third largest Irish Bank - Anglo Irish Bank. This comes hot on the heals of a Government Bank guarantee for all bank liabilities which requires Irish taxpayers to insure Bank liabilities of up to 400 Billion - more than twice Ireland's GDP!
This implosion in the Irish economy is now being followed by an implosion in the Irish political system. A quiet revolution is happening. Voter passions have been inflamed by the disclosure that the former Chairman of Anglo-Irish Bank, Sean Fitzpatrick, had undisclosed loans from the bank of 87M and that another Irish Bank - Irish Life and Permanent - had deposited 7 Billion in Anglo-Irish bank for a few days just before he latter's financial year end to make it appear that the latter had a healthy flow of deposits in its annual accounts.
The Government has been forced to take desperate measure to shore up the national finances in the face of a rapid decline in tax revenue. The Government current account deficit threatens to balloon to 10% of GDP - over three times the 3% limit allowed under the Maastricht Stability and Growth Pact . It has sought to claw back 1.3 Billion from a levy on Public Service pensions entitlements - to the understandable outrage of public servants.
A huge blame game is being played - with the rogues gallery being filled by bankers and developers who hyped the Irish property boom, regulators who failed to regulate, and above all, politicians who failed to Govern. Fianna Fail, the largest party which has been in power for most of the past 87 years of Irish independence, has fallen to third place with just 22% popular support. It normally gets more than twice that. The Labour Party, which normally gets c. 10% of the vote, now stands at 24% popular support.
Many commentator's see a fundamental realignment in Irish politics - from a traditional divide between Fianna Fail and Fine Gael - two conservative parties which arose from those who took opposite sites in the 1922 Civil War - to a more standard European Left-Right Divide - with Labour (25%), Sinn Fein (8%) and the Greens (4%), making up a viable Left wing alternative Government for the first time.
However I would caution against reading too much into short term political trends. Labour and Sinn Fein take diametrically opposed views on Europe - and Lisbon in Particular - and are about as far apart on matters of ethos as it is possible to be. Labour has always opposed Sinn Fein's militaristic tendencies - until very recently it was little more than the political wing of the Irish Republican Army (IRA), the most active Terrorist group in Europe - and even though peace has reigned since the Good Friday Agreement (1998) - the divisions in Irish society which this conflict engendered remain bitter.
What is not in doubt however, is that Fianna Fail will be absolutely trounced in the June European and Local Elections by an electorate just waiting to take its revenge against a party which was seen as being too close to the Bankers, and Builders who led Ireland into the property boom and who are seen as being largely responsible for the bust which followed.
How the Government's unpopularity will effect the second Referendum on the Lisbon Treaty - expected to be held in October - is a more complex question however, and one which I will return to in a separate post!