Ireland’s current economic misery is an unexpected reprise for an old country that was poor for a long time, and then became the idolized Celtic tiger of the new euro economy over the last two decades. Its artful transition from a humble rural economy to a vigorous new age model mirrored the fortunes of the most nimble Asian tiger economies: It built an export economy powered by well-educated young workers, novel government tax incentives and lightly regulated banks. With all that going for it, its fall from grace has come hard.
In reality, Ireland began hitting the skids more than three years ago when its scorching housing bubble began flaming out in the run-up to the Great Recession. Its big banks got into trouble like most in the go-go economy of the mid-2000s, recklessly speculating on the amazingly profitable housing market and fueling their inflationary run on cheap borrowing to kite ever-higher mortgage loans.
When the bubble popped, Ireland recklessly rushed to give its banks unusually extensive government guarantees to avoid public notoriety and bankruptcy. But to pay for that, it had to cut deeply in the public sector. Even so, Ireland had rejected the idea of a euro-zone bailout until just last week.
Its denial came to an end over the weekend, when it finally seized the latest European Union offer of an 80 billion to 90 billion euro bailout (about $109 billion to $123 billion). That may salve Ireland’s immediate problems, but it won’t fix the Emerald Isle’s economy for the long term unless the Irish government acknowledges that the banks that precipitated the fall must require their stockholders to take some losses.
The European Union will have to accept that, as well. Its insistence on more public austerity measures is counterproductive.
Ireland already has implemented a harsh austerity package; it shouldn’t have to squeeze more. Its austerity program is already likely to trap Ireland, like Greece, in a self-defeating deflationary mode of public service and job cuts and tax increases that, in turn, perpetuate a more sluggish economy.
Ireland’s tax revenues have already been falling since 2009, and they are likely to continue spiraling downward as unemployment rises and consumer spending retreats. Government debt has also hit 32 percent of gross domestic product, and that trend will worsen dramatically if self-induced deflation further erodes income, jobs and revenue.
Another consequence is that government bonds will be harder to float, and will carry higher and higher interest costs. The government is already paying 9 percent to issue revenue bonds, or more than double what Germany, the euro-zone’s strongest economy, is paying.
With Ireland now joining Greece in a debtor’s cell, speculators also will increase fiscal pressure on the euro-zone’s other weak members – Portugal, Spain and, to a lesser extent, Italy.
A tight repayment schedule for the new bailout cost, which alone could amount to 30 percent to 50 percent of Ireland’s gross domestic product, would just further aggravate Ireland’s plight.
The European Union, like the United States, has misjudged the depth and longevity of the damage done by the Great Recession, and the time it will take to dig out. Its stronger members, led by Germany, want to punish the weaker members who require aid. That, too, is self-defeating, though Germany seems not to understand its own self-interest in extending both credit and patience to the customers who feed its own export dynamo .
Economies ravaged by the broad global recession need more time, more sustenance and more stimulus spending than most political leaders want to admit. Ireland’s plight may be more intense than most, but only in degree.