Just under a decade ago Ireland was basking in the glory of a booming economy. This bonanza that earned Ireland the now discarded title of the ‘Celtic Tiger’ was built on a financial services sector that exploited the country’s tax efficiency laws, a property boom that kept both the Exchequer and banks happy, and an illusion of affluence that encouraged people to spend and borrow far more than they could afford.
After a prolonged reality check that saw thousands of young, qualified Irish people emigrating, thousands of others made jobless or homeless and a general disillusionment with politicians, Ireland seems to be back on course to become one of the better performing EU countries. But like other countries who threw prudence to the wind for a decade or two when the economic cycle was on the upside, Ireland still has to atone for the sins of the past.
The Irish government did the right thing when it rescued the Bank of Ireland and Allied Irish Bank at the beginning of the financial crisis that then became an economic crisis.
In 2010, then Finance Minister Brian Lenihan, who was already struggling with a terminal illness, decided to pour €21 billion of taxpayers’ money to rescue AIB. The EU, the IMF and the ECB imposed what many consider humiliating conditions on the Irish government in return for their financial and political support.
This rescue operation ensured that Irish banks survived. This benefitted the whole economy, which is now showing encouraging signs of growth despite the fact that the latest elections introduced an element of political instability.
Many cynics are arguing that Irish businesses are getting used to having a weak government too riddled by bickering to find the time to meddle with private enterprises.
The rescue of Irish banks was a forced move taken at a time of economic pressure.
It did not address effectively the quality and sheer quantity of the bad loans on the banks’ books. According to S&P, Ireland’s household debt-to-disposable income ratio was 168 per cent in 2015. This compares to 127 per cent in the UK and 54 per cent in Italy.
“When a banker makes a serious mistake, taxpayers will have to pay for the consequences after a decade or so”
Put simply, the Irish still have to find a solution to the excessive amount of money borrowed in the boom year to buy properties many could not afford or, even worse, to support a lifestyle that was unsustainable.
The recent European Banking Authority stress tests did not produce satisfactory results for Irish banks. Stress tests are not without their weaknesses and they are not indicators of future performance of banks. But they do bring out the negative effects of legacy problems that every particular bank may have. It is a sobering reality that when a doctor makes a serious mistake, the patient’s funeral usually follows in a short time. When a banker makes a serious mistake, taxpayers will have to pay for the consequences after a decade or so.
Even if Irish banks clean up their balance sheet by dumping their doubtful debts and increasing their capital substantially, the Irish economy will still face formidable challenges. S&P has cut its forecast for Irish economic growth in 2017 to 3.2 per cent from 3.8 per cent. The effects of Brexit on Ireland are still far from clear.
Rating agencies are warning that Irish banks may have to write off even more customer loans of that may be negatively affected by this political development.
The UK is Ireland’s second most important trading partner after the US.
I am confident that Ireland will continue to be one of the EU’s better performing countries. But its economic model may have to be changed. Reliance on tax efficient legislation will continue to be challenged by the bigger EU countries like Germany and France.
The cleaning up of the banks’ balance sheet needs to be more thorough – even if this means raising substantial amounts of capital to cushion the impact of the sins of the past.
Most importantly, Ireland must give more importance to social solidarity to support the victims of the economic downturn. Thousands who have lost their jobs in the last decade are still unemployed. Many have or are about to lose their homes because they cannot pay their mortgages.
Many others had to take low-paid jobs that are barely sufficient to bring a ray of hope in their lives.
There are lessons to be learnt from the Irish economic experience of the last decade. The sins of the past are not easily forgiven.
johncassarwhite@yahoo.com