the rise and fall thereof November 26, 2010
From Foreign policy magazine comes this article chocked full of warnings for the U.S. Heaven forbid if the U.S. $ is ever supplanted as the reserve currency for oil!
Bumbliners
How Ireland's economic miracle went bust.
BY CAMERON ABADI | NOVEMBER 26, 2010
Ireland was traditionally one of Western Europe's poorest countries, a rural and intensely Catholic country from which the best and brightest left in search of opportunity elsewhere. Recessions were a routine occurrence, and high unemployment was endemic through much of the 20th century. Ireland may have thought those days were past, but the implosion of the country's recent economic miracle has kindled memories of less fortunate times. With a government in crisis, the Irish are taking to the streets and asking, "How did we get here?"
Ireland's period of rapid economic growth -- the era during which the country was known as the Celtic Tiger -- began in 1995. For the next 12 years, Ireland grew at an unprecedented rate, ranging between 6 percent and 11 percent annually. Much of that growth was enabled by EU financial aid, which was funneled into infrastructure investments and improvements in the national education system.
At the heart of the economic boom was a massive influx of foreign investment. Low corporate tax rates encouraged major companies -- from Apple to Dell to Google -- to locate their European headquarters in Ireland.
Over the last decade, as the Irish economy boomed, Ireland's demographic patterns began to reverse: Rather than sending emigrants abroad, it began attracting immigrants from across the European Union. Unemployment was so low that few residents of Ireland needed the assistance of government employment-services offices, like the one seen above. By 2007, an estimated 10 percent of the population was foreign-born, making Ireland one of Europe's most multicultural countries.
With its rapid growth, Ireland became an increasingly popular destination for foreign capital -- European banks were especially attracted to the Celtic Tiger's rates of return on financial investments. And with the introduction of the euro in 2000, Ireland also had access to low borrowing rates in international capital markets. Soon the country was swimming in cash.
Unfortunately, the country's financial services were not nearly scrupulous enough to withstand the new influx of money, earning a reputation for being poorly regulated, if not actively encouraged by the government to be profligate in their lending. Despite a series of accounting scandals, Ireland's Financial Services Regulatory Authority never imposed any sanctions on domestic financial institutions. As early as 2005, the New York Times was calling Ireland the "Wild West of European finance."
Irish banks funneled cash into the burgeoning domestic real estate market. The mutually reinforcing financial, construction, and real estate sectors served as the foundation of the Irish economy over the past decade.
When the real estate bubble burst in 2007, it threatened to take the entire national banking system with it. In 2008, the government of Prime Minister Brian Cowen, seen above -- who oversaw the bubble's growth as finance minister from 2004 to 2008 -- organized bailouts for the country's biggest banks. Anglo Irish Bank was nationalized in early 2009, while other banks received massive loans to keep them afloat.
Cowen's government simultaneously prepared emergency austerity measures in 2009 and 2010 to deal with plummeting tax receipts. The policies -- which included the closing of military barracks, the introduction of university tuition, and reductions in pensions -- elicited widespread public protest. Hundreds of thousands of people went on strike. Prime Minister Cowen barely survived two no-confidence votes in 2009 and 2010, as the government's approval ratings plummeted.
Through 2010, Ireland's banks required continuing and growing bailouts -- by September of this year, the total had reached 40 billion euros (roughly 6,400 euros for every Irish man, woman, and child) -- to appease the testy international bond markets. But when German Chancellor Angela Merkel insisted at an EU summit in October that holders of European debt should be forced to take losses as part of any debt-restructuring, Ireland's position worsened rapidly. Some protesters in Ireland, like the man above on Nov. 22, appealed to patriotic sentiments, but the country's bond ratings continued to plunge.
On Nov. 21, Irish Finance Minister Brian Lenihan said that he would recommend that Ireland formally request a bailout package from the European Union, European Central Bank, and International Monetary Fund. Cowen announced shortly thereafter that he would call for early election after parliament approves an emergency budget early next year, after which the conservative opposition is expected to take office. Lenihan and Cowen are shown above in a sardonic graffiti mural in Dublin that depicts them as the lead characters in the film The Blues Brothers. The politicians may have brought the economic blues to their country, but unlike in the film, there's unlikely to be any singing and dancing in the streets.
