Embedded Files
02 September 2015
Neil Dooley - PhD student at the Centre for Global Political Economy, University of Sussex.
Contrary to official EU claims, Ireland tells a cautionary tale, undeserving of its current poster-child status
As Greece has been gradually and then suddenly disintegrating, the European Union has recruited Ireland as its pin-up for austerity. Patronising images of Greece as the eurozone’s impetulant child are communicated by European political figures with ever diminishing subtlety. In contrast, Ireland is held up as a shining example of a country that has ‘taken its medicine’. As Taoiseach Enda Kenny recently ventured, through sacrifice, slow and steady progress, and by following the prescriptions of the troika, Ireland has emerged as the fastest growing economy in the EU. Ireland is thereby offered as a clear lesson to Greece: recovery is only possible by growing up and playing by the rules.
Yet Ireland’s poster-child status has been met with plenty of scepticism. Some, such as Aidan Regan and Samuel Brazys, have suggested that Ireland’s recovery has nothing whatsoever to do with fiscal contraction, pointing out that it’s much more likely that Ireland’s export sector is indirectly benefiting from Quantitative Easing in the USA. Others have drawn attention to the ways in which the Irish recovery may actually be, at least in part, illusory – a statistical fiction premised upon the significant presence of multinational corporations and their activities in GDP figures, as well as the existence of the International Financial Services Centre (IFSC) which contributes little to the domestic economy. Others still have suggested that high levels of emigration and an increase in part-time over full-time jobs are artificially inflating the falling unemployment rate.
But the problems with Ireland’s poster child status go even deeper than all of this. In fact, a very different kind of lesson can be drawn by taking a closer look at the history of Ireland’s economic crisis. The Irish economy has gone through a number of sweeping transformations in recent decades. Few in Ireland would deny that the ‘good times’ would have been unthinkable without deepening European integration. But what is often not recognised is that European integration also contributed to the emergence of Ireland’s banking crisis. Indeed, Ireland can actually be seen as a warning about how playing by the rules does not necessarily work out well for everyone.
Ireland’s cautionary tale begins with the ‘Celtic Tiger’. From the mid-1990s onwards the Irish economy grew at a rate that was three times the European average. Its unemployment rate more than halved during this period. Remarkably, this growth was export-led and driven by a high-profile, high-tech manufacturing sector. It was also achieved with some of the lowest levels of public debt and spending on the whole of the European continent.
Fast forward to 2008, and Ireland was in the midst of a banking crisis that the IMF claimed to be among the most severe in world economic history. From the early 2000s aggressive lending by the Irish banking system propelled a property boom which replaced the export sector as the main driver of Ireland’s economic growth. Employment, tax returns and economic growth became overly reliant on the construction sector, leading ultimately to the outbreak of a catastrophic fiscal and banking crisis in 2008.
What explains this dramatic decline? One answer can be found by looking at how European integration helped change the landscape of Irish banking. It is not often remembered that, until the mid-1980s, the Irish banking system was one of the most heavily regulated systems in Europe. Following Ireland’s accession to the EEC in 1973, governments attempted to protect the country’s competiveness and current account balance from rising inflation and import penetration by issuing credit controls on ‘non-productive sectors’. These and other restrictions were reinforced to varying extents throughout the 1980s.
New developments in European integration changed all of this. In anticipation of Ireland’s participation in the European Single Market in 1993, these controls were dismantled. As is well known, liberalisation and deregulation of banking and finance were central aspects of the ‘re-launched’ European project from the late 1980s onwards (as signalled by the Single European Act and the Maastricht Treaty). Ireland eagerly participated in this project and witnessed the unprecedented export boom of the ‘Celtic Tiger’. But, behind this, it also witnessed the dramatic transformation and expansion of its banking sector. In fact, it was specifically as a result of Ireland’s adaptation to the Single Market and later EMU that its banking sector moved away from being tightly controlled and began to operate under the infamous system of ‘light touch regulation’.
Sinéad Kelly tells the story of how European integration also promoted a more competitive and internationalised banking environment in Ireland. The EU’s ‘Single Passport’ for banking and other directives associated with the Single Market and EMU facilitated the entrance of foreign banks into the Irish market. Banks such as Royal Bank of Scotland (trading as Ulster Bank) fundamentally transformed the mortgage lending landscape as they reduced mortgage interest rates and introduced various financial innovations, including but not limited to the notorious ‘100 per cent mortgage’. Irish banks responded to such competition in kind and increasingly privileged short-term lending, regardless of risk. Such reckless lending was further propelled by the increasing availability of cheap foreign capital following waves of capital market liberalisation in Europe, which subsequently exploded following the introduction of the euro. It was this new banking environment, emerging as part of new processes of European integration, which was to drive the fatal property boom.
Of course, we shouldn’t forget that Irish governments in the early 2000s tragically missed an opportunity to put the brakes on this boom, and even actively encouraged it. Nevertheless, it is crucial to recognise that, in the decade before, European integration had already helped create an aggressive banking sector capable of driving debt-led growth. Irish governments may indeed have failed to halt the bubble, but European financial integration helped it to emerge in the first place.
In other words, Ireland’s shift from sustainable export-led to precarious debt-led growth establishes the country as a cautionary tale, rather than a poster child for the European project. The landscape of Irish banking was radically transformed through European integration, with the result that it ultimately overwhelmed the more stable and productive sectors of the Irish economy. In effect, Ireland got into trouble in the first place, precisely because it did play by the rules of European financial integration.
It is only in this respect that Ireland should be understood as a lesson for Greece. Its poster-child status is a crude conciliation prize for adhering to the rules in a game that has long been rigged against all the countries of the periphery.
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