Behind the Irish crisis

The new coalition government portrays the crushing defeat of Fianna Fail as a cathartic, revolutiona

The beginning of the economic transformation of Ireland announced itself to me one morning when I was living in Mexico City in 1995. It was there in a headline in the New York Times: "Irish economic growth lifts hopes". The article mentioned rapid growth, booming exports and high rates of new jobs - not what I usually associated with the country I'd left behind eight months before.

Mexico, too, had been the object of worldwide acclaim for its economic performance. Sweeping aside the protectionism that it had championed throughout its 60 years in power, the Institutional Revolutionary Party had opened Mexico to globalisation. The country was booming and millions got hold of a credit card for the first time. Mexicans thought they were about to realise the dream of becoming a first-world country. Watching from the White House, George H W Bush said that Mexico was rising again like the Aztec eagle. The man credited with this wonder was President Carlos Salinas. But just as his six-year term was ending, in 1994, Mexico crashed into crisis: the value of the peso plunged and millions of investors pulled their money out. The International Monetary Fund intervened with a huge bailout. Salinas was blamed for the disaster. His humiliation was so great that he was forced into exile. He chose to live in Ireland.

A few months after settling in Dublin, Salinas gave an interview to the Irish Times, in which he enthused about his new home. He remarked on two national characteristics of his hosts that particularly appealed to him. One was how easily they put their faith in people. "They trust a lot, the Irish," he said admiringly (or perhaps incredulously). The other trait was the strength of the country's desire to be sovereign, which reminded him of Mexico. Sovereignty has a long pedigree in Ireland but, contrary to the impression of the exiled former Mexican president, people often saw it as fragile or unreal. In the New York Times article advertising what was to become the "Celtic Tiger", a young engineer at an American-owned computer chip company in the west of Ireland confided that it was only in the previous decade that the Irish had become "increasingly aware that we control our own destiny".

No longer. The major economic decisions to be taken by the new Irish coalition government will be framed by the interests of the IMF and the European Union, which, between them, have loaned Ireland €85bn. Trust has disappeared - trust in the banks but most of all in Fianna Fail, which used to regard itself not as a mere political party but as a national movement. (Éamon de Valera's granddaughter Síle told a party meeting in the early 1980s: "We all have our very special Fianna Fail faith, as it were, in which we all believe.")

Fianna Fail was so accustomed to power that, on the rare occasions it was consigned to opposition, it was, in the words of the historian Joe Lee, "psychologically orphaned". Nobody has been forced into exile but the scale of the defeat of Fianna Fail - Ireland's own institutional revolutionary party lost 51 of its 71 seats in the election on 25 February - is comparable to the scale of Salinas's humiliation in Mexico.

What is left? Even if the new government succeeds in renegotiating the interest rate on the IMF/EU loan (almost 6 per cent), the Irish will have to endure what Enda Kenny, the new Taoiseach, referred to during the election campaign as "an interminable night" of higher taxes, wage freezes, unemployment and emigration.

At the special conference where the Labour Party decided to join Fine Gael in coalition, delegates were forewarned by their leader, Eamon Gilmore, that at future conferences they would have to pass through "a forest of placards" because of the harsh policies the government would have to implement. Several speakers in favour of coalition recalled how people they had met while canvassing had broken down in tears as they attempted to describe how the crisis had affected their daily lives. Gilmore urged that Labour had to go into government for the sake of "the people who came on the doorsteps to us and cried".

Fine Gael presented the election as catharsis. Kenny described the result - his party's best ever - as a democratic revolution. It was an attempt to capture the zeitgeist, to insinuate that the removal of Fianna Fail from power was akin to the end of the Mubarak regime in Egypt. But the suggestion that what happened on polling day in Ireland amounted to an overturning of the established order was far from the truth.

Leaving aside gains for Sinn Fein and a loose alliance of left-wing independents, as well as Labour's strong showing, the major winner was a conservative party whose general outlook for most of the past 78 years has been barely distinguishable from that of the party it defeated. This is all the more puzzling because the crisis in Ireland, although part of the worldwide market failure in finance, had particular local roots. The major cause of the collapse of the Irish banks was not sub-prime mortgages or abstruse financial instruments, but reckless lending to property developers who, as a class, have long-standing connections with politicians. Given the depth of betrayal by the bankers and the fusillade of polemics against the political system over the past three years, why has the Irish electorate been so conservative?

The Irish economic crisis has been documented as a collective calamity affecting the entire population. Photo spreads of the ghost estates, shells of unfinished houses abruptly abandoned by builders when the money ran out and stories of those who remortgaged modest properties to buy now worthless apartments in Bulgarian resorts have suggested that heavy losses have touched everyone. They haven't.

During my visits to Dublin over the past three years, I have been puzzled to see fashionable restaurants still full not only on Fridays and Saturdays but on Sunday evenings and weekdays as well. Such resilience suggests that there is a stratum of Irish society for which the recession is an inconvenience, rather than a catastrophe.

In the last week of the election campaign, I spent an evening canvassing with Lucinda Creighton, a young, articulate, high-profile, right-leaning member of parliament for Fine Gael for the seat of Dublin South-East. In pre-boom Dublin, in the 1980s and early 1990s, the large Georgian houses in Belgrave Square in Ranelagh were given over to student flats. Now, one after another, they have been lavishly restored with polished granite steps, gleaming varnished doors and shining brass knockers. The front yards are strewn with tasteful gravel and likely to have parked in them BMWs and Jaguars. Fine Gael's eager body of canvassers attacked these streets with energy.

What was remarkable about that evening was how we heard no anger on the doorsteps. Nobody cried or broke down with a tale of burdens or hardship. At one door, a man in a pink shirt assured Creighton that she would get his vote even though he had previously voted for Fianna Fail. The candidate began to assure him that she understood it must be a hard decision. But he looked at her as if she were naive or misguided: to jump from Fianna Fail to Fine Gael would cause him no torment at all, he said.

A personal story opened a window on this serenity. It is the way of Irish politics that voters use their parliamentary representatives to solve their home problems, so the Fine Gael candidate was often presented with stories of individual difficulties. One man said he had heard that Fine Gael was proposing to introduce capital gains tax on house sales. He explained that he had recently developed epilepsy and would not be able to look after himself when his adult children finally left home. To pay for a place in a nursing home, he would have to sell his house. But a capital gains tax might deter him, and then where would he be? Creighton assured him not to worry; a capital gains tax on homes was not in the manifesto.

This man had bought his house in 1986. Despite the collapse in asset prices, anybody who bought a house in Ireland in the 1980s or 1990s is still sitting on a lot of wealth. Irish house prices quadrupled between 1996 and 2007. Just as many of those who survived the famine of the mid-19th century prospered and became more powerful among a greatly reduced population, this time there will be a substantial class of people who will benefit from the Irish crash.

The winners from the famine - strong farmers, the Catholic Church - formed the bedrock for the conservative society that Ireland is today. Because modern Ireland was born in difficult economic times, Irish politicians failed to develop an idea of what a wealthy Ireland should look like. Irish independence coincided with the destruction of a globalised economy during the First World War: it was the age of autarky.

The men who took power in the first gov­ernment in independent Ireland in 1922, the founders of Fine Gael, had given all their attention to political and cultural independence but little thought to the economic goals of the new state. For ten years, they ran Ireland with Vic­torian austerity, pursuing balanced budgets and sound money. Then came Fianna Fail, with its credo of self-sufficiency. Éamon de Valera, who was to dominate Irish politics for the next 30 years, questioned whether the standard of living in western Europe was "the right and proper one" and committed his country to what elsewhere would be regarded as righteous poverty. It was a policy that, for a moment, captivated John Maynard Keynes. In a celebrated lecture in Dublin in 1933, attended by de Valera, Keynes affirmed: "Were I an Irishman, I should find much to attract me in the economic outlook of your present government."

But the rapid advances all over Europe after the Second World War left Ireland falling farther behind. While the masses on the Continent had fridges, washing machines and Vespa scooters, in Ireland, as the visiting German writer Heinrich Böll noted, they made do with the Mass, movies and cigarettes. In 1956, the Irish Times summed up the differences in economic policies between the two civil-war parties for voters as: "You can drink a little more under Fine Gael or smoke a little more under Fianna Fail."

As the political scientist Tom Garvin argued with some brio in his provocatively titled book Preventing the Future: Why Was Ireland So Poor for So Long?, published in 2004, Ireland was held back by inadequate education, a reactionary Church and the dead hand of class and vested interests.

By the end of the 1950s, Ireland's population, at fewer than three million, was the lowest ever officially recorded. With hundreds of people leaving small towns every week to take the boat to England, contemporary commentators worried that the Irish nation might survive, as one writer put it, "only as an enervated remnant in a land occupied by foreigners".

In 1958, the Irish government made a momentous policy shift, opening the country up to trade and foreign investment and preparing to apply to join the European Economic Community. The man to carry out this policy was Seán Lemass of Fianna Fail. He was almost 60 when he came to power, having long laboured in the shadow of de Valera. In July 1963, a month after John F Kennedy made a journey to his ancestral home, Lemass appeared on the front cover of Time magazine. He was credited with "lifting the Green Curtain", as if the opening up of the Irish economy was the equivalent of a peek behind the Iron Curtain.

In prose that prefigured the future Celtic Tiger era, Time marvelled at the "new factories and office buildings, the Irish-assembled cars fighting for street space in Dublin, the well-dressed people shopping in supermarkets" and "the waning of national self pity". Even the movies were forcing change. The then justice minister, Charles Haughey - Lemass's son-in-law - revealed that sex had become so frequent on screen that the censors had been told to go easy with the scissors "or else our cinemas won't get any films at all".

The 1960s brought television and free edu­cation, as well as more titillating nights at the pictures. The decade also marked a watershed in political culture. Lemass, as one of his contemporaries from the independence struggle remarked, came into office a poor man and was poor when he retired as Taoiseach in November 1966. In a recently published study of his career, there is a photo of Lemass, son of a draper, looking dapper on his way to work in a dark woollen overcoat with white flecks.

In another picture from four years later, taken in the grounds of Stormont on the morning of his historic and unannounced visit to Belfast in 1965, the first by a prime minister from the Republic of Ireland to the North, he is wearing the same overcoat.

Such unconcern for style would never do for his son-in-law. Haughey epitomised a new relationship between politicians and men on the make; "the men in the mohair suits" became a catchphrase for those who occupied the intersection of politics and business in the 1960s. When he finally became Taoiseach, in December 1979, Haughey was as famous for the monogrammed shirts that he bought in Paris, with "donations" from his friends in business, as for any of his other accomplishments.

A pattern had been established in that first boom of the 1960s. Ireland had been so poor for so long, so consumed with issues of identity, sovereignty and language, that it neglected to develop a philosophy of the money culture.

In 1964, a year after Time's profile of Lemass, a young historian and future politician named David Thornley noted the death of the policy of economic nationalism. "What is remarkable to the point of incredibility," he wrote, "is the passiveness with which this change has been accepted inside a single generation."

Five years later, Conor Cruise O'Brien returned from the United States to contest the 1969 election for the Labour Party in Haughey's Dublin seat. During the campaign, he regularly drew attention to Haughey's dubious finances but the issue had little traction.

“I don't think my attacks on him did me any good or him any harm," O'Brien recalled later. "The electorate doesn't take in a thing like conflict of interest. They thought it was a straight case that I was envying this rich man - it seemed a kind of standard political exchange within
the system."

At the turn of the new century, when the Irish economy had experienced several years of remarkable growth, a celebratory book of interviews was published with business leaders who had made their mark. It was the moment when the boom - which was based on the convergence of sensible policies with a fortuitous demographic moment, when most people were of working age - was drawing to a natural close, and before the artificial boom that was based on property took off. Sober appraisal of fortuitous circumstances was out; self-congratulation was in.

The editor of the collection, a business consultant named John J Travers, praised "a distinctively Irish enterprise spirit"; one could only conclude, therefore, that its signature traits of "ability, imagination and passion" were in short supply in other nations. He put his faith in the morality of entrepreneurs: "While a government framework of regulation and law is essential in achieving the balance between individual and community interest," he wrote, "the ultimate determinant of that balance will be the culture, beliefs and value systems of the individual members of a society."

The events of the past few years have exposed how much of this faith was misplaced. The overwhelming sense in Ireland is that the wealth of the boom years that was not creamed off by a golden circle of initiates has been wasted and lost for a generation that should have inherited it. Regulation, law, culture and value systems all proved inadequate to prevent the elite from making spectacularly poor judgements.

Ireland faces years of austerity to pay off the debts of its banks. Some kind of managed default may yet be the only option, because it is difficult to see how ordinary taxpayers can continue to carry the burden. Ireland has limited options for generating wealth: it will have to continue to be open to the world, which is why keeping its corporate tax rate at 12.5 per cent has become such an unlikely symbol of sovereignty. Ireland's aim for 2016 - the centenary of the Easter Rising - is, according to Kenny, to be "the best small country in the world to do business in". But can the country's politics be reconstituted on the basis of such a narrow obsession?

The nearest thing to an articulation of the economic philosophy of the government that presided over the boom and bust was in a speech made in July 2000 by Mary Harney, then deputy prime minister, to an audience of visiting American lawyers in Dublin. Geographically, she said, Ireland was closer to Berlin than Boston but: "Spiritually, we are probably a lot closer to Boston than Berlin."

The Irish economy that her government had shaped, Harney said, was created primarily to appeal to corporate America. "We have cut taxes on capital. We have cut taxes on corporate profits. We have cut taxes on personal incomes. The result has been an explosion in economic activity and Ireland is now the fastest-growing country in the developed world. And did we have to pay some very high price for pursuing this policy option? . . . The answer is no. We didn't. This model works. It allows us to achieve our full economic potential for the first time in our history as an independent state."

In his Dublin speech in 1933, in which he flattered de Valera, Keynes remarked that the Great Depression had made people disillusioned "not because we are poorer . . . but because other values seem to have been sacrificed unnecessarily". His words capture well a sense of the way many people in Ireland feel about their current ruin.

It is fashionable to ridicule de Valera for his pious notions about a frugal society and what Garvin called his anti-economic views. De Valera's Ireland was impoverished, Garvin argued, because its leaders thought "in static and rural ways and in ethical rather than scientific terms". It was necessary to jettison this thinking for Ireland to become rich. It may be necessary to think in ethical terms for Ireland to work out how to be rich once more.

Maurice Walsh is Alistair Horne visiting fellow at St Antony's College, Oxford and teaches at Kingston University. His latest book, "The News from Ireland: Foreign Correspondents and the Irish Revolution", is newly published in paperback (IB Tauris, £12.99)