Canada and the World
Current Events with a Canadian Perspective
Last update
28 February 2011
Ireland Slides into Public Poverty
After years of booming industrial development
the Irish economy has collapsed, largely
because of irresponsible banking activity
Half a decade ago, Ireland was riding high. In October 2004, John Peet wrote in The Economist “Surely, no other country in the rich world has seen its image change so fast. Fifteen years ago Ireland was deemed an economic failure, a country that after years of mismanagement was suffering from an awful cocktail of high unemployment, slow growth, high inflation, heavy taxation and towering public debts.”
Peet went on to catalogue Ireland’s successes:
- economic growth rates of as high as 10 percent a year;
- per capita Gross Domestic Product was 133 percent of the European Union average;
- unemployment had fallen from 17 percent in 1987 to four percent in 2003; and,
- government debt shrank from 112 percent of GDP to 33 percent.
A combination of factors caused Ireland’s spectacular rise:
- Tax cuts and low interest rates attracted companies to build factories;
- Unions and businesses cooperated with the former accepting lower wage rates for a say in management; and,
- European Union subsidies helped drag up what had been one of the continent’s weakest economies.
All of these heady economic statistics earned Ireland the title of the Celtic Tiger. This was a reference to countries such as Singapore, Hong Kong, South Korea, and China whose booming growth had earned them the title Asian Tigers.
William Murphy
Ireland has known plenty of hardship. This sculpture in Dublin commemorates the terrible famines of the 1840s during which about one million people starved to death and another million emigrated to escape the misery.
Property Boom Mirrored Economic Expansion
The Economist’s John Peet, while praising Ireland’s economic growth saw dark clouds forming on the horizon. He wondered if the Irish miracle might run out of steam and if the people might be getting caught up in a property price bubble.
He was right on both counts.
With more money in their pockets, the Irish people started buying property. Stories circulated of house prices doubling in a few years and their owners walking away with a huge profit.
Everybody wanted a piece of the action and banks were happy to lend them the money
to buy in to the market. More people buying in pumped prices higher and higher in
a classic bubble. There were plenty of warnings issued, but few people listened.
Most people were confident they could get off the merry-
Brian Keeley of OECD Insights (July 2010) reports that, “In the 12 years or so up
to the peak of the market in 2006, house prices almost trebled. Construction came
to account for more than a fifth of Irish GDP – getting on for double the EU average
– and employed more than one in eight workers, or twice as many as in the mid-
Property Bubble Bursts
Keeley reports that property prices in Ireland are now down by as much as 50 percent. That means that people who borrowed money to buy property often owed more than the property is worth.
Many decided to walk away and leave the property to the bank they borrowed the money from. This left Ireland’s banks in a huge financial pickle; they had huge debts on their books that they couldn’t recover.
The banks can’t sell the property because the demand for it has collapsed. Keeley writes that “estimates vary, but a figure of more than 300,000 vacant or abandoned houses is widely cited. To put that in context, Ireland has a population of just 4½ million.”
So, Ireland’s banks turned to the Irish government for help. In a story now familiar
to people in the United States, Britain, and elsewhere, the Irish government of Prime
Minister Brian Cowen (left) obliged.
The banks were too big to be allowed to fail, went the argument. If the banks fold then so would the entire economy. Then, the dominoes might start to topple over everywhere and the direst predictions are that other national economies will be dragged down by Ireland’s failure. Those of Spain, Portugal, and Greece are reckoned to be the most vulnerable.
Bailout Cripples the Government
Writing for Inside Ireland (November 25, 2010), Eoghan McKeever says the cost of the bank bailout could hit 50 billion Euros. This is a staggering about of money for so small a country.
Essentially, what happened is that the debts of the banks have been assumed by the government. But the Irish government can’t afford to carry these debts either so it has had to borrow massively from the European Union and the International Monetary Fund.
But, Bloomberg News says the rescue package is now worth “85 billion euros ($114
billion) as [Cowen’s] government struggles to prop up the country’s banks. Contagion
from the Irish crisis has spread through the euro region, stoking speculation that
the euro region’s 750 billion-
Is Massive Government Debt a Problem?
The Economist asks the important question, does it matter that government finances are so far in arrears? “After all,” adds the magazine, “world governments owe the money to their own citizens, not to the Martians.”
The answer is that it is a problem because government debt, not just in Ireland, has been rising, and continues to rise, faster than economic growth. The magazine says that “implies more state interference in the economy and higher taxes in the future.”
If the debt gets to an unmanageable height, as it is doing in some countries, a fiscal crisis ensues. Governments such as Mexico, Argentina, and Russia have defaulted on their debt obligations in the past couple of decades.
What follows such defaults is not pretty. Factories close, jobs are lost, social services collapse, and, sometimes, civil unrest destroys democracies and ushers in dictators who promise simple solutions.
Citizens Suffer the Consequences
However, the bailouts in Ireland are not popular with the Irish people and the protests (above) began.
Those lending money to Ireland are demanding the government tighten its belt so it
can pay back what it owes. Of course, it’s the folks in the street who must do most
of the belt-
Already, Cowen’s government has raised the sales tax to 23 percent and has announced it will shed 24,000 employees. The minimum wage has been cut and so too have welfare payments. Corporate tax rates are untouched.
Image credit
William Murphy
Sources
“The Luck of the Irish.” John Peet, The Economist, October 14, 2004.
“The Ghost of Ireland’s Property Boom.” Brian Keeley, OECD Insights, July 30, 2010.
“Irish Bank Bailout to Cost €50bn says S&P.” Eoghan McKeever, Inside Ireland, November 25, 2010.
“Merkel, Sarkozy Say Irish Rescue Talks Must Conclude Quickly.” Jann Bettinga, Bloomberg News, November 25, 2010.
“The Global Debt Clock.” The Economist, October
“Global Public Debt: $40,660,121,927,289 (U.S.).” Richard Blackwell, Globe and Mail, November 19, 2010.
“Angry Electorate Coldly Liquidate Fianna Fail.” Miriam Lord, Irish Times, February 28, 2011.
© Canada and the World, November 2010
All rights reserved
GOVERNMENT
DEBT MONSTER
Even before bank bailouts and stimulus spending most industrialized economies were swimming in debt; the recession has made the problem bigger.
According to The Economist Intelligence Unit the current global public debt stands at more than $40 trillion; that’s a tad over $6,000 for every child, woman, and man on the planet. Ten years ago the total public debt was a mere $18 trillion.
The magazine keeps a running total going of the increase in public debt on a website, although it cautions its totals are “not perfectly accurate.” However, even acknowledging the number may be off by a million or even a billion or two, it is still a appallingly large amount of money.
VISUALIZING
BIG NUMBERS
Numbers measured in hundreds of billions or trillions are utterly meaningless to
the average person. One trillion is 1 plus 12 zeros -
Pagetutor.com has created some visual aids to help put these large numbers into perspective and posted the result on YouTube.
It points out that “A packet of one hundred $100 bills is less than half an inch thick and contains $10,000. Fits in your pocket easily and is more than enough for week or two of shamefully decadent fun.”
A million dollars in the same bank notes would fit into a grocery bag.
A hundred million would fill a standard skid up to about waist height, and a billion would need ten skids.
But a trillion? This is where it’s necessary to get into the good old football field
analogy. One trillion dollars, in hundred dollar bills, stacked waist-
DEBTORS ROLL CALL
Writing in The Globe and Mail (November 19, 2010) Richard Blackwell points out that Japan is “The most heavily indebted country in the world.”
The country owes more than $10 trillion, or a bit more than $84,000 per capita.
The United States comes next, but is catching up fast, with an indebtedness of $9.2 trillion ($29,730 per head). On a per capita basis, Canada outdoes the United States with a public debt of $37,121 per person for a total government debt of $1.26 trillion.
Ireland, the latest European country to fall into the financial glue has a per capita debt ($35,165) that is lower than Canada’s.
While Greece, the poster child for horrible government finances, has racked up indebtedness of $33,582 for each of its citizens.
WORLD’S WORST
According to Economy Watch, Ireland has the dubious distinction of tying with Lithuania for the world’s worst performing economy; both are predicted to decline by three percent in 2010.
Next come:
Equatorial Guinea -
Latvia -
Montenegro -
Finland -
Estonia -
Bulgaria -
Germany -
GOVERNMENT DEFEATED
The political party, Fianna Fáil, that has dominated the Irish government for decades has been thrown out of power in a national election. It was severely punished by voters who hold it responsible for the economic catastrophe that has hit the country.
As Miriam Lord reports in the Irish Times (February 28, 2011), “When the verdict came, it was crushing.” Fianna Fáil went into the vote with 70 seats in the parliament and has come out with just 14. A new government, under Fine Gael’s leader Enda Kenny, will need the support of coalition partners.