The Eurozone Crisis--Ireland (Part Five)

IRELAND

In many ways, Ireland looks like a bog-standard property bubble and bank crisis--not much different from Japan in the 1980s/1990s, Florida 2000s, Iceland 2008 and even UK (Northern Rock/RBS) 2007-8. 

I still remain unclear about four points:

 (i) How did Ireland get wealthy so quickly? By 2006, Ireland was one of the wealthiest countries in the world. Looking at Ireland across the Irish Sea from Wales, we Welsh were all gobsmacked. A bunch of people who we had always thought of as our poorer Celtic cousins were suddenly swimming in gravy. 

(ii) To what extent was the EMU and/or the ECB culpable in the bubble and bank crash?  To pose a counterfactual--If Ireland had been outside of the EMU like Britain, would the bubble and crash have happened?

(iii) To what extent was the Troika culpable for the terms of the November 2010 Bailout?

(iv) How has Ireland (if indeed it has) managed to bounce back faster than Greece, Portugal and Spain? How well has Ireland done in comparison to countries outside the EMU like Iceland and the UK?

  

Introduction

Watch the following documentaries and read the article by Michael Lewis, a great re-telling of the Irish boom and bust: When Irish Eyes Are Crying

For other popular treatments of the bubble and bust, see the books by David McWilliams--one of the few economists (along with Morgan Kelly) to predict the crises--Follow the Money--available cheaply on Kindle.

For a short documentary introducing the problems of Ireland (from 2011), see:

Ireland Property--Boom and Bust 

RTÉ Ireland How We Blew The Boom here  (Takeaway message: "We must all take responsibility for the choices we made") 



Both Ireland and Spain experienced a huge property boom and then slump. The slump crashed the banks in Ireland and--to a lesser extent--in Spain too.

See this prescient quote by Wolfgang Munchau from March 18 2007--before the crash:

"In Ireland, the GDP share of construction and housing is even higher [than Spain where  the construction and housing sector accounts for 18.5 per cent of gross domestic product, about twice as high as the eurozone average], at 20.7 per cent. While the performance of the Irish economy during the past few decades was remarkable, there are some deep underlying structural problems that are now surfacing. In particular, Ireland has been fast losing competitiveness within the eurozone – not a subject that has been talked about much outside Ireland recently. With interest rates rising and a slow return to sanity in the financial sector Ireland is going down the same route as Spain, perhaps only faster."



Questions to keep in mind:

1. Ireland was the first Eurozone country to experience a banking crisis. Why?

2.  To what extent was Ireland's membership of the EZ a cause of the 2008 crash?

3.  How has Ireland's post crash experience differed from that of Greece and Spain? What explains the differences?

4. Has Ireland recovered? Did "austerity" work?

5. What impact will Brexit have on Ireland?

Let's begin with some charts:

Demographically, Ireland is much "younger" than many other European countries. Compare the Population Pyramids of Ireland with those of Italy and Spain.

Spain and Ireland--Government Budget:








Spain and Ireland--Current Accounts



Ireland:









Spain and Ireland Sovereign Debt






Spain and Ireland Unemployment

Spain and Ireland House Inflation--compare to Germany

--consider the difficulties this graph presents for a Central Bank seeking to implement an effective counter-cyclical policy.









Ireland was in a world of its own:

Ireland as Celtic Tiger

Ireland experienced a staggering rate of economic growth and employment creation during the 1990s, which exceeded the rest of Europe and other advanced industrial countries (the OECD). See this primer from the Wall Street Journal.


Ireland Corporate Tax Rate:

Ireland Taxes as Percentage of GDP

Ireland Economic Growth:

Ireland from Emigrants to Immigrants:

There are some useful details and analysis on recent Irish migration patterns from Constantin Gurdgiev's True Economics blog here:

This economic success quickly gave rise to the idea that Ireland was a "Celtic Tiger"--reference to the fast growing East Asian Tigers  of the 1970s and 1980s.  For a typically hyperbolic expression of this point of view, see the NYT's columnist Thomas Friedman, "Following the Leaping Leprechaun,"--an article (amplified in his book The World is Flat) that invited a later scornful response "Just How Wrong Can the NYT's Tom Friedman Be?"

For a scholarly take on Ireland 1990s experience, see Niamh Hardiman, "Politics and Markets in the Irish “Celtic Tiger” Experience: Choice, Chance, or Coincidence?"

Frank Barry, The Globalized Irish Economy in Good Times and in Bad" (a more advanced discussion)

Derry O'Brien, "Measuring Ireland's Price and Labour Cost Competitiveness." (a more detailed and advanced discussion)

Ireland Property Bubble

The Timeline of the Irish Crisis:

For a great re-telling of the Irish boom and bust, read Michael Lewis, When Irish Eyes Are Crying

For a good discussion of the causes of the bubble, see Morgan Kelly (2009):

Quoting Morgan Kelly:

"--Ireland is unusual because its entire economy after 2000 came to be driven by a property bubble.

--By 2006 construction accounted for 20% of GNP, banks had dangerous exposures to building and commercial property loans, and domestic wages had been driven to uncompetitive levels.

--During the 1990s Ireland experienced the Celtic Tiger: rapid employment growth driven by competitive labour costs.

--As employment and income rose, house prices were driven up.

--Construction rose and this increased employment, leading to further construction: multiplier accelerator.

--As property prices rose, value of collateral increased and perceived risk of property lending fell: fi nancial accelerator.

--Effect of bank lending exacerbated by narrowness of Irish market: by increasing lending by 20% a handful of banks could drive up property prices by 20%: elements of pyramid scheme.


--Market came to be driven by expectations of capital gains: rental yields below 4%"

November 2010 Troika Bailout 

After Months of Resisting Ireland Applies for a Bailout NYT Nov 21 2010

Philippe Legrain's articles on the Irish bailout are well-worth reading as is his book European Spring

See Fintan O'Toole's piece:

"The imposition of €64 billion of private banking debt on Irish citizens has been so thoroughly normalised that those of us who find it shocking begin to wonder if perhaps it is we who are mad. We need sane outside voices to remind us, every so often, that yes – it really is an outrage. The latest is Philippe Legrain who until earlier this year was head of the team of strategic policy advisers to the president of the European Commission, José Manuel Barroso. In his fine new book, European Spring, Legrain helpfully reminds us of the nature of the game: “had Irish banks defaulted on all their debt at the end of September 2010, German banks would have lost €42.5 billion, British ones €27.5 billion and French ones €12.3 billion.”

.

After the Bank Crisis

Other important scholarly essays looking back at the Irish boom and bust:


John Fitzgerald, "Ireland's Recovery from Crisis"

Karl Whelan, "Ireland’s Economic CrisisThe Good, the Bad and the Ugly"

Barry Eichengreen, "The Irish Crisis and the EU from a Distance"

THE IRISH CRISIS IN COMPARATIVE PERSPECTIVE

For a comparison of the Iceland and Ireland situations, see

 Baldur Thorhallsson and Peadar Kirby, "Financial Crises in Iceland and Ireland: Does EU and Euro Membership matter?"  here

Thor Gylfason, "Iceland's Seven Meagre Years"

Paul Krugman, "Iceland, Ireland, and Devaluation Denial" which includes this useful graph:


Martin Sandbu, "Devaluation's Deceptive Draw" FT (argument: it wasn't devaluation that explains Iceland's better employment performance but a looser monetary policy.)


Sebestian Dellepiane and Niamh Hardimon,  "European Economic Crisis: Ireland in Comparative Perspective"

Henry Farrell blogs about the above piece on Crooked Timber here--some of the comments are helpful too.

Sebestian Dellepiane and Niamh Hardimon, The Politics of Fiscal Effort in Spain and Ireland

Sebestian Dellepiane and Niamh Hardimon, Governing the Economy: A Triple Crisis

Newspaper articles:

Colm McCarthy, "Bank Inquiry fails to shed light on shortcomings of individual lenders"



For the Irish Parliament (Oireachtas) Inquiry into the Banking Failure (January 2016), see here

Role of the media in property boom, a newsclip from the Parliamentary Inquiry

Dermot Gleeson – Former Chairman, Allied Irish Bank at the Banking Inquiry

Banking Inquiry - Joe Higgins Questions Dermot Gleeson Former Chairman of AIB

David McWilliams on what should have been done on Sept 30 2008

I think it is a good idea to think here too about the Royal Bank of Scotland. See the book and the documentary:

Impact of Brexit on Ireland

"Ireland may have to Consider Leaving the Euro" 

"Irish Leaders Fear Brexit Will Bring Economic Disaster"

"Ireland Beyond Brexit"--a useful collection of articles from the Irish Times


These lectures are also well-worth watching if you are interested in the Ireland chapter of the Eurozone Crisis:

Morgan Kelly, Whatever Happened to Ireland (2014)

Peter Mair, How Parties Govern (2013)

Christine Lagarde, Ireland Bailout Compared to Greece (2015)

Ireland's 26 PerCent Growth Leaves Economists Speechless

There are some very interesting documentaries about the 2008-2009 Bank Collapse in Ireland--esp. the failure of the Cowen Govt. and the Nationalization of the Anglo-Irish Bank.


Crisis Inside the Cowen Government (Part One)

Crisis Inside the Cowen Government (Part Two)

Bertie Ahern Documentary

Bertie Ahern==Mahon Report

Freefall--The Collapse of Irish Banks