FRFI 211 October / November 2009

Ireland is suffering its most severe economic crisis since the foundation of the state in 1922. In October 2008, it became the first country in the Eurozone to officially enter recession; the IMF has said it faces the deepest crisis of any advanced economy in the world. The resulting social and political crisis now  threatens the very stability of the state.

In the first quarter of 2009 Irish Gross National Product (GNP) was down 12% on the previous year.1 The 2009 budget deficit stands at €18bn. Figures released in September by the Central Statistics Office reveal that unemployment has more than doubled in the past year to 264,600 or 11.6%2 and is forecast to rise to almost 17% in 2010. The Economic and Social Research Institute predicted in April 2009 that ‘Ireland’s economy will contract by around 14% over the three years 2008 to 2010...this is a truly dramatic development.’ The construction sector saw over 72,200 jobs lost in the past year alone.

In response, the Irish government has introduced a number of measures – all of which have so far failed. In the past year, two budgets forced strict cutbacks on public spending whilst increasing taxation. In January, the government nationalised Anglo Irish Bank and injected €7bn into the country’s two biggest lenders, the Bank of Ireland and Allied Irish Banks. That recapitalisation – the equivalent of 4% of GDP – barely filled the hole in the banks’ books.

A new plan, set out in September by Brian Lenihan, the Irish finance minister, proposes to take bad loans with a face value of about €77 billion off the balance-sheets of the country’s biggest banks and create a new agency, the National Asset Management Agency (NAMA), to take over toxic loans in exchange for €54bn in government-backed bonds. In August former Taoiseach Garret Fitzgerald warned that otherwise Ireland could fall ‘into the hands of the IMF’.

Celtic Tiger no more

It was not supposed to be like this. Ireland was said to be the neo-liberal success story, with a year-on-year GNP growth between 1994 and 2000 ranging between 6% and 11%, transforming the country from one of the poorest economies in Western Europe to one of the richest. The ‘Celtic Tiger’, as it became known, raised Irish living standards to unprecedented levels: everyone was supposed to be basking in the success. Fuelled by bank lending, house prices and property speculation reached massively over-inflated highs.

From 1956, successive Irish governments had pursued low taxation policies in a bid to increase investment and open up the economy to the international market. In 1973 Ireland joined the European Union. By the late 1980s political barriers were relaxed; Ireland was for sale and foreign direct investment on a greater scale began. Between 1998 and 2002, foreign direct investment stock rose from less than €60bn to over €160bn; more recently, €25bn flowed into the country in 2007 alone.

Housing: the great collapse

Prior to the collapse, house building represented around 12% of the Irish economy in GDP terms, about twice the typical share in other advanced economies. Between 2000 and 2007, 75,000 new homes were built every year; with a population of just over four million, this was equivalent to 1.2 million houses a year in British terms. Between 1997 and 2007, house prices rose by 251% – double that of the US and higher than any other developed nation.3 According to The Economist almost a third of this increase had no basis in economic reality.

The Irish population grew as a baby boom took place alongside an influx of foreign workers who, assisted by European integration, flocked to Ireland to work in the construction sector. Irish builders had so much work they simply had not enough workers. The boom also fuelled Sinn Fein illusions in a peaceful, almost seamless, transition towards an all-Ireland economy. It had a significant impact on the north: in 2006 house prices in the Six Counties rose by 48%. However, in 2008, as the bubble burst, prices fell by 40%, while in the Twenty Six Counties the average house price has fallen by 10% in the past year to €270,493.4

Attack on living standards: resistance appears

Faced with financial crisis, the Irish government brought forward its 2008 budget from December to October. Among the measures were more taxation and privatisation. Particularly affected were pensioners. Until then, everyone aged 70 or over had been entitled to free medical, dental and optical treatment. The budget proposed to introduce a means-tested system. Over 20,000 people on the Pensioners Medical Card scheme were forced to hand back their cards. The government also abandoned a €10 million scheme to vaccinate 26,000 12-year-olds against cervical cancer by September 2009.

Thousands have already protested across Ireland against public sector cuts, including a march of 100,000 in Dublin in February. On 7 April 2009 the Irish government announced new cuts in state spending. These have inevitably resulted in further resistance and political instability.

Paul Mallon

1 Central Statistics Office, Dublin, Quarterly National Accounts, Quarter 1 2009, http://www.cso.ie/releasespublications/documents/economy/current/qna.pdf

2 Central Statistics Office, Dublin, Quarterly National Household Survey Quarter 2 2009 http://www.cso.ie/releasespublications/documents/labour_market/current/qnhs.pdf

3 The Economist 5 April 2008

4 http://www.esri.ie/irish_economy/permanent_tsbesri_house_p/