There’s no point even trying to downplay the financial mess that Ireland is in. A combination of banks that are effectively insolvent and a brutal austerity budget that has not worked has left the emerald isle on the brink of bankruptcy. The once admired “Celtic tiger” economy is now a defenceless kitten at the prey of the financial markets. How has it come to this and how can Ireland get out?
The story is one of cack-handed and dithering politicians, a recession that hit Ireland harder than most other European countries and a misguided austerity budget that, George Osborne take note, cut too early and too deep.
Ireland’s astonishing growth in the 1990s and most of the 2000s was built around the property market, with a boom in construction, cheap lending, and a large increase in house prices. Since the financial bubble burst in 2007, house prices have fallen by between 50 and 60 per cent and loans to developers turned into bad debts, wrecking Ireland’s banks and leading the government to provide a €45bn bailout to keep them afloat. Meanwhile, as tax revenues have collapsed and the austerity budget has led to higher unemployment, the Irish government is expected to run an enormous budget deficit of 32 per cent this year – more than three times higher than Britain’s.
The crisis in Ireland has been brewing for months, and every day that passes causes more turmoil for the Eurozone. It’s all well and good for Taoiseach Brian Cowen to tell the press that Ireland is “fully funded until the middle of next year” and that the markets are “not being good to Ireland”. Although it’s a bit rich to criticise the same markets which helped fuel Ireland’s boom during the good years, Cowen is correct in the sense that the Irish government is not going to default on its debt and right that the markets are scenting blood. But that, unfortunately, is what the bond markets do. Indeed, the cost of insuring Irish debt increased by 25 basis points immediately after EU finance ministers failed to agree a deal
The reality is that Ireland’s has several options – both of them very painful and humiliating. One is to make immediate use of the EU’s bail-out facility possibly to the tune of between €80bn and €100bn. Ireland’s banks are bust, they are heavily reliant on loans from the European Central Bank, and a clear message would be sent to the bond markets that the Eurozone will protect its members. It would stop a repeat of the Greek crisis and prevent the likes of Spain and Portugal being dragged down by the contagion. Another option is to go the IMF, but the terms would be more brutal than the EU’s and Ireland’s humiliation greater. Either way, a decision has to be made – and made now. The markets will not wait.
But Cowen continues to ostrich-like insist that Ireland is fine, and the EU finance ministers are not pushing the Irish hard enough. EU President Herman Van Rompuy said yesterday that without a speedy resolution the Eurozone was “in a survival crisis”. He’s right. Today’s Ecofin meeting needs to produce a concrete outcome not more dithering and delay.
There are also similarities with Ireland that the UK should be wary of. Like Ireland, the UK’s economic boom was, in large part, fuelled by cheap credit and a massive hike in property prices. Like Ireland’s Fianna Fail government, the dominant party of Irish politics (which is now polling between 10 and 15 per cent), the Conservative led coalition is attempting to slash public spending and 500,000 public sector jobs to balance its budget.
House prices in the UK have started to fall again, and I think we can expect a fall of 10-15 per cent over the next six months as the Coalition’s cuts start to bite, unemployment rises, the stand-off between potential buyers and sellers of property continues, and banks continue their reluctance to lend. However, since there is more demand and a smaller supply of housing in the UK, an Irish-style 50 per cent decline is very unlikely. Even so, since so much of the UK economy is built on housing prices, even a 10 per cent housing price fall could lead to a stagnation of growth and possible double dip recession.
So the Irish government needs to act quickly and decisively. Professor Nouriel Roubini put it succinctly in the Financial Times when he wrote that “put simply the Irish – like the Greeks – are on a path to near or complete insolvency”. Ireland and the EU need to agree that a multi-billion euro bail-out will be guaranteed if needed. Meanwhile, other EU countries, particularly the UK, should learn a cautionary tale of the sheer folly of following credit fuelled economic booms with swingeing cuts.
Benjamin Fox is chairman of GMB Brussels