'The Fall of the Celtic Tiger’: How Ireland Fell Into the Abyss, Part 1 of 2

THE FALL OF THE CELTIC TIGER: IRELAND AND THE EURO DEBT CRISIS

By Donal Donovan and Antoin E. Murphy
Oxford University Press
Published July 2013

Reviewed by John Bruton

I have long been waiting for an honest and dispassionate analysis of how the Irish economy, which had been growing rapidly since 1994, was transformed into a deflated bubble in 2008. It is a subject of more than mere academic interest to me.

From 1981 to 1987, when Ireland last experienced an economic downturn, I twice held the office of Minister for Finance. At that time, the problems Ireland faced were those of unemployment, inflation, high international interest rates and high government debt.

Since 2008, the problem Ireland faces is similar in some respects, but different in others. While the average Irish family is still considerably better off than it was in the 1980s, international interest rates are much lower, and inflation is not an issue - the new problem is one of huge private debts owed by Irish families and businesses, on top of even bigger government debts than in the 1980s.

In “The Fall of the Celtic Tiger,” Donal Donovan, a former World Bank economist, and Antoin E. Murphy, an economic historian, give a totally convincing account of how today’s problem came about. In its pages, they chronicle how solid, sustainable growth from 1994 to 2000, based on real improvements in Irish market competitiveness, along with increased investment, was transformed into artificial growth, based on unsustainable borrowing- and spending decisions by Irish families, Irish businesses and Irish governments.

As a result of cheap credit, and rapidly rising property prices, Ireland experienced a property bubble between 2000 and 2007. This bubble led to such a radical distortion of its economic structures, and to such an increase in debt, that full recovery will take 20 years.

The cheap credit was available because of decisions made by the U.S. Federal Reserve and by European Central Bank (ECB). Both favoured low interest rates. They did so to avoid dislocations to the economy that might have arisen from the dot-com burst, 9/11, and the costs of German reunification. In these goals, they succeeded. But the extra credit found its way across national boundaries into housing markets in various countries, causing a bubble in prices, most notably in Ireland. In 2008, the bubbles burst.

(Right: A computer chip. Information technology related businesses  played a large role in the Celtic Tiger - photo by Andrew Dunn.)

The bubble distorted the Irish economy in ways that will take years to repair. There was a doubling in the size of the construction sector, large and uncompetitive pay increases across the economy, and rapid increases in numbers of people employed in the public sector. The money flowing in, temporarily, to government coffers, made it hard to resist demands to permanently increase the size of the government sector.

In just five years, from 2001 to 2006, the share of the Irish workforce in the public sector reached 29 percent, as against 19 percent in Germany. The numbers in top grade positions in the civil service grew by 86 percent.

The numbers employed in the (mainly government-run) Irish health sector grew by 20,000 or 25 percent. By 2009, nurses’ salaries in Ireland were the third highest in the Organization for Economic Co-operation and Development, and Ireland was spending more on pharmaceuticals per person than any OECD country, except the United States, Canada and Greece.

Rates of social welfare benefits, paid to those unable to work because of illness, age or unemployment, grew by 67 percent in real terms. While public sector pay rates have since been reduced substantially, these benefits have not been. The idea of reducing social benefits is historically poisonous in Ireland. In 1930, when the cost of living was falling, a Minister for Finance reduced the Old Age Pension by one shilling a week. That decision was still being used against that minister’s party 40 years later.

Bubbles misallocate human capital. Instead of choosing careers and skills for which there is enduring global demand, talented people were drawn by quick rewards into activities for which demand is inherently temporary, like construction. This is what happened in Ireland between 2000 and 2007. Vital educational and training opportunities were lost. Wrong career decisions were made. A generation of young people were misled.

(Left: The Spire of Dublin, a symbol of Ireland's successful new economy completed in 2003 at a cost of 4 million Euros.)

In a way, it is easy to see why people made the mistake of thinking that house prices (and household wealth) would never stop rising.

House prices had already risen by 133 percent between 1994 and 2000. These increases were justified by rapid economic growth, immigration, and new family formation, all of which created a genuine demand for housing.

The trouble is that the increase in house prices continued after 2000, and was financed, not by improved competitiveness, but by excessive lending, and by income generated from, inherently temporary, construction spending.

For example, mortgage lending by Allied Irish Banks increased by 139 percent between 2003 and 2008. Meanwhile, on top of this, AIB lending to developers to buy land, on which future houses might be built, increased by 332 percent!

The assumption of the bankers lending this money seemed to be that demand for housing could go on growing, to infinity. A moment’s thought would have shown how nonsensical that was. But almost nobody took a moment to think.

Read Part 2: How Ireland Fell Into the Abyss

Meanwhile, discuss with us your experience of the bust -- have you or loved ones been mauled?

Read more reviews for The Wild Geese by John Bruton.

John Bruton, a former Teachta Dála in Ireland’s Dáil Éireann, served as the nation’s Taoiseach (Prime Minister) from 1994 to 1997, and as Ambassador of the European Union to the United States from 2004 to 2007.  He is currently President of IFSC Ireland.  A graduate of University College Dublin, with degrees in economics and law, he is a passionate student of history.  John has graciously agreed to write book reviews on occasion for The Wild Geese. You can get more of John's perspectives on Irish -- and world -- affairs at http://www.johnbruton.com/.

 

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Tags: 20th Century Ireland, Commerce, Opinion, Reviews

Comment by Rónán Gearóid Ó Domhnaill on August 23, 2013 at 2:32pm

Today and  yesterday a news feature was that the price of property was set to rise by 8% in Dublin. The property obsession led us into this mess. People bought a house, not to live in, but as an 'investment'. We are still obsessed with this.

Comment by Bit Devine on August 23, 2013 at 3:01pm

I have a friend who is/was a developer in Ireland. I asked him, during the bubble years, as I observed his "expansion" plans, "What will you do when the bubble bursts and there is no money to sustain the housing boom?"

His reply was "The bubble isn't going to burst any time soon. I will be just fine. Nothing to worry your pretty head about with me."

That was in 2007, by 2009, three of the properties in which he had an interest were under foreclosure and he was fighting for bankruptcy.

Money goes hand in hand with Power...and greed is the downffall of both

Comment by Gerard Cappa on August 23, 2013 at 3:11pm

"Bubbles misallocate human capital. Instead of choosing careers and skills for which there is enduring global demand, talented people were drawn by quick rewards into activities for which demand is inherently temporary, like construction."

Very interesting, and then there was the list of pension payments made to former government Ministers: the list was provided by the Office of the Paymaster General and the Houses of the Oireachtas.in November 2011.

According to these official figures, at least 30 former ministers each receive a govt pension of over 100,000 euros per year. That's over 100k each, for the rest of their lives, well over 3 million a year.

Brian Cowen was listed at 150k per year. Bertie Ahern 152k. If they had been contributing to private pensions they would have needed to amass pension funds of between 5 and 6 million.

All very talented people, all 30 of them, I'm sure. And, while the demand for their services was indeed temporary, the rewards are not -  the pensions are paid for the rest of their lives.

According to the Office of the Paymaster General and the Houses of the Oireachtas,.in November 2011, John Bruton's pension was 141,849 euros.

See the report in the Irish Independent here, under the title, " Thanks, big fellas - 100,000-plus for 30 ex-ministers in payment bonanza":

http://www.independent.ie/irish-news/thanks-big-fellas-ahern-and-co...

Just think of all those pesky nurses, bleeding the country dry. I wonder how much of a pension the average nurse can look forward to?

Comment by Gerry Regan on August 23, 2013 at 3:16pm

Interesting figures, Gerry. But are we killing the messenger here? Just asking.

Comment by Gerard Cappa on August 23, 2013 at 4:04pm
Don't think so, Gerry. Mr Bruton (and the party he led) were surely more than messengers, and if he highlights the pay paid to public workers from the tax coffers as being a contributory factor then the "payment bonanza" as identified by the Independent's report is surely worth a mention.
Comment by Rónán Gearóid Ó Domhnaill on August 23, 2013 at 4:22pm

Fairplay to John Bruton for taking the time to write a review. Unless he has changed side Mr Bruton is a 'blueshirt' and in the last twenty years (indeed eighty) years his party Fine Gael were not very long in power. ergo  most of the blame has to be put at the door of Fianna Fáil. John Bruton was in power before the Celtic Tiger really took off.  

In the proceeding years the Irish people were consenually raped by Fianna Fail. The Mahon Tribunal cost 300 million Euro and only one man, Frank Dunlop was found guilty.

Comment by Rose Maurer on August 24, 2013 at 11:53am

Fascinating post, and riveting comments - such a tragedy that the Irish people are suffering, and will continue to so so, no doubt, for some time to come.

Comment by Rónán Gearóid Ó Domhnaill on August 25, 2013 at 3:08am

The Irish are the smiths of their own fortune. They were perfectly happy to vote  a corrupt Taoiseach back into power in case  a new one affected the price of property. The state coffers are empty because the government just spent money and did not save for a rainy day. 

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