Paper Tiger: Ireland’s Elusive Economic Recovery

Paper Tiger: Ireland’s Elusive Economic Recovery
A demonstrator holds up a banner at a ‘We Won’t Pay Campaign’ anti-water charge protest outside the Irish Water headquarters, Dublin, Ireland, Nov. 29, 2014 (Brian Lawless/PA Wire URN:21600475, Press Association via AP Images).

Ground zero in Ireland’s recent economic, political and social history can be traced to the night of Sept. 29, 2008. “The night of the bank guarantee,” as the Irish public came to call it, dramatically changed the country’s course. Before then, Ireland had enjoyed more than a decade of rapid economic growth, emerging from years of poverty to become one of Europe’s most dynamic economies, the so-called “Celtic Tiger.”

Between 1990 and 2005, the employed population of Ireland increased from 1.1 million to 1.9 million. Gross domestic product soared, and gross national income per capita doubled between 1990 and 2000 and continued increasing until 2008.

But the spectacular fall of the global financial services firm Lehman Brothers forced Ireland to squarely consider the impending fate of its own banks, one of which, Anglo Irish Bank, was teetering on the brink of a catastrophic collapse. According to the International Monetary Fund, the profits generated by the Irish banking sector during the Celtic Tiger years were among the highest in Europe. The sector was growing at twice the eurozone average. Anglo Irish Bank was doing the biggest business, managing tens of billions in assets at its height.

Fearful of what they understood to be imminent and irreparable fiscal meltdown, Irish politicians, regulators and bankers were called to a tense meeting that lasted into the early hours of the following morning. The solution they decided on was the snap implementation of a 440 billion-euro blanket national bank guarantee that would provide every Irish deposit in six embattled banks with unlimited protection. In all, the guarantee amounted to 240 percent of Ireland’s annual GDP.

If Dublin felt relief, the international response was significantly more mixed. The world, and Europe in particular, was shocked. Neelie Kroes, the European Union’s then-commissioner for competition, was among the first to lament Ireland’s lack of consultation with the EU before confronting its problem. But an outspoken former Irish finance minister, Charlie McCreevy, also working in Brussels that year, dismissed the pleas for greater caution and reflection. Governments, he said, didn’t have the “luxury of waiting forever and a day.”

However, with the benefit of hindsight, and as a result of considerable examination in recent months, Irish assessments of the response have become far sharper. It is increasingly clear that the bank guarantee had a negative effect on Ireland. The arrangement was unsustainable by its nature and ultimately drove the country to approach the EU and the IMF in November 2010 to request an 85 billion-euro bailout, plunging the country into a deep and painful recession marked by severe austerity measures. Unemployment soared, peaking at 15.1 percent in early 2012, and GDP fell into sharp decline.

Since then, the situation appears to have brightened somewhat. By the middle of last year, Ireland’s fundamentals appeared strong. According to the Central Statistics Office, GDP increased by 7.2 percent between the fourth quarter of 2013 and the fourth quarter of 2014, while investment, domestic and foreign, rose by 9.1 percent. This made Ireland once again the fastest-growing economy in Europe. Consumer spending, however, was not even close to keeping pace—the chilling effect of new taxes mixed with stubborn unemployment, hovering at roughly 11 percent, resulted in just a 0.3 percent increase.

Ireland has rightly begun to wonder whether it is really in the midst of recovery. “What recession?” is the question asked, however jovially, on social media, on the radio and on the street. The Irish are again confronted with crowded cafes in Dublin, rising house prices and advertisements for helicopter parking at horse races. But where is this recovery being felt? Where has it yet to take hold? And what are the political implications of both the years of recession and the nascent recovery?

To answer these questions requires examining the effects of the bailout, the austerity measures, the uneven recovery and the new political currents beginning to emerge in Ireland.

The Bailout, a Blow to National Pride

In the immediate aftermath of the bank guarantee, not even then-Finance Minister Brian Lenihan was on board with a bailout. Although the guarantee expired in September 2010, in October, Lenihan said he was “absolutely sure” that Ireland would not need to seek assistance from the IMF. Brian Cowen, the taoiseach (prime minister) whose center-right party, Fianna Fail, led the government during the bank guarantee, shared this conviction. But by November, with interest rates spiking and the economy teetering, Cowen had no choice but to turn to the EU and the IMF, a politically unpopular move that led to his resignation as party leader in January 2011.

A general election in March 2011 resulted in the election of another center-right leader, the Fine Gael party’s Enda Kenny, as taoiseach, an office he has held since. Kenny, a former schoolteacher from Ireland’s rural northwest, was elected leader of Fine Gael in 2002 and is hailed by his party as having “rebuilt” it. He named a new Cabinet in coalition with the Labour Party and picked up where Cowen left off. By July, he successfully secured an interest rate cut on the EU-IMF rescue package, offering Dublin some room to maneuver in its austerity efforts.

Ireland’s relationship with Europe and the rest of the world altered substantially during the three years it was subject to the bailout’s terms. From the moment of its entry under the auspices of the European Financial Stability Facility in 2010 to its exit in December 2013, the national economy was the subject of unprecedented scrutiny. The grouping of Ireland with other embattled eurozone economies like Greece, Spain, Italy and Portugal—collectively derided as PIIGS—was met with deep dismay by a country whose sovereignty had been hard-won and whose pride had been badly bruised.

Donal Donovan, former deputy director of the IMF, and Antoin E. Murphy, former professor of economics at Trinity College Dublin, accurately described the public’s reaction in “The Fall of the Celtic Tiger: Ireland and the Euro Debt Crisis”: Even more troubling than the substance of the agreement, they wrote, was “[t]he arrival every three months of teams from the IMF and the EU to swarm over the accounts and hold the government to task for all aspects of its financial activities,” which came as “a major blow to public pride.” The IMF’s “resident representative” monitored the Central Bank and posted weekly reports on the Irish budget and banking transactions, to avoid a repeat of Greece’s habit of reporting false data.

Perhaps unsurprisingly, Europe became a focus of Irish attention during the bailout years. News bulletins took on a different hue: Correspondents in Brussels and Frankfurt became regular fixtures, and domestic issues took a backseat. Overnight, new protagonists like Ajai Chopra, then-deputy director of the IMF’s European Department; Jeroen Dijsselbloem, the president of the Eurogroup; or Olli Rehn, EU commissioner for economic and monetary affairs, took center stage. Higher-profile players, like German Chancellor Angela Merkel and ECB President Mario Draghi, became even more familiar to the Irish. During the 2012 Union of European Football Associations European Championship, a group of Irish soccer fans flying out to a game in Prague were photographed giddily holding aloft a large banner that read “Angela Merkel thinks we’re at work,” drawing international media attention.

The Irish public also spent years analyzing points of weakness in the eurozone and the potential consequences for Ireland. In particular, there was a prurient interest in Greece, which many national news outlets covered assiduously.

Ireland was the first of the so-called PIIGS to exit the bailout, and without the support of a precautionary credit line, meaning it would no longer be equated with the other countries in crisis. By following instructions to the letter and devoting itself fully to fiscal discipline, Ireland met its targets and reduced its bond yields to the point that it was able to return to the private bond markets. By 2014, 10-year bond yields had fallen below 3 percent. Greece’s, by contrast, were averaging well over 8 percent.

By the fall of 2012, Ireland’s response to economic adversity was receiving glowing reviews internationally. Kenny made the cover of Time magazine, his gaze hovering above the headline “The Celtic Comeback.”

Throughout 2014, praise continued to roll in. Merkel called Ireland’s exit from the bailout a “tremendous success story.” The Financial Times effused that Ireland had provided the world with “growing evidence of how countries that shape up after a crisis can recover strongly despite an unfavorable international outlook.” It added, “Few countries soared as high or crashed as hard.”

Of course, none of this was possible without extraordinary popular sacrifice. As a result, despite all of the applause and backslapping, public disillusionment is on the rise.

Beginning in December 2014, Ireland finally opened an official commission of inquiry into its banking crisis, which is ongoing. It has managed to lasso an impressive roster of influential and pivotal witnesses, including a former European Central Bank president. Former Bank of Ireland Chief Executive Brian Goggin told the commission that Sept. 29, 2008 was the worst day of his life. Bill Black, a former U.S. regulator and current professor of economics at the University of Missouri, said that the guarantee was “an insane decision,” “the worst possible decision that could have been made” and “the most destructive own-goal in history.” Penalties, Black said, needed to include jail terms.

Meanwhile, every week for the past four years, a campaign has been assembling to protest the bank debt burden. “Ballyhea Says No to Bondholder Bailout,” the movement’s full name, is the brainchild of Diarmuid O’Flynn from the village of Ballyhea in County Cork. O’Flynn and those who have campaigned with him at a national and international level remain adamantly opposed to the terms of the EU-IMF bank bailout. O’Flynn, who ran unsuccessfully as an independent candidate in last year’s European elections and now works as a parliamentary assistant to an outspoken Irish member of the European Parliament, argues that the bank debt should be decoupled from sovereign debt.

His bitterness over the loss to Ireland’s dearly held sovereignty has resonated. Anti-EU, IMF and ECB sentiment pervades Ireland, almost two years after that so-called troika departed the island, ending its supervision. But at the time of the bailout, there was very little, if any, sustained dissent. To understand why public anger has grown, it is necessary to take a closer look at the impact of austerity.

Brutal Austerity and a Subdued Response

Ireland’s decision to guarantee its main banks was a unilateral one, a snap call made without consulting fellow members of the EU or anyone else. It was controversial and met with great circumspection at the time. “The government has erred, with potentially catastrophic results,” economist David McWilliams wrote one month later. “This is hardly the best platform for recovery.”

In the short term, certainly, McWilliams was right. Ireland endured five difficult years of austerity. The seven budgets announced between October 2008 and October 2013 were punishing—raising billions in additional taxes, cutting billions in public spending and imposing excise duty hikes across the board.

Even before the bailout, there were measures to reduce spending in the wake of the bank guarantee. In an emergency budget in April 2009—the second budget in six months, an anomaly—unemployment benefits for those under age 20 were cut by half, and the government chose to revoke entitlement to a medical card enabling access to healthcare to those over age 70. Despite the drastic cuts in welfare benefits and the increased scrutiny of new enrollees, however, the number of people on the dole climbed steadily, to some 450,000 people by 2010.

Once the troika took control of the process, the situation grew worse. In its memorandum of understanding, the troika was clear: 750 million euros in welfare spending needed to be cut in the first year of the bailout. This led to significant changes to Ireland’s social welfare system. In the first budget announced under troika supervision in December 2010, the unemployment benefit was cut by eight euros per week. After an uproar in response, the budgets announced in 2011 and 2012 maintained the rate of weekly payments, but scrapped and reduced other welfare subsidies, such as the back-to-school allowance for children. In 2013, the government announced it would further reduce payments to young jobseekers, from 144 euros to 100 euros per week for those between 22 and 24, and from 188 euros to 144 euros per week for 25-year-olds.

Nor was there any relief on other fronts. In 2010, fresh cuts to tax credits gouged net incomes, and a number of lower-paid earners found themselves newly subject to taxation. Childcare allowance was cut, and the registration fee for college was increased. A reviled new tax was introduced, the Universal Social Charge (USC), that steeply increased tax liability for low-income brackets.

The Fine Gael-Labour coalition took over in 2011, but the change in government did not lead to a change in fiscal policy. For its first budget in 2012, the coalition imposed further cuts and scrapping of supports, while increasing thresholds for welfare and other social assistance and imposing a 23 percent hike to the value added tax, resulting in an overall fiscal adjustment of 3.8 billion euros. The 2013 budget was no less severe, achieving an adjustment of 3.5 billion euros.

It took until the 2014 budget before Ireland began to reverse course on austerity. For the first time in years, no radical changes were made to the fundamental structure of the Irish tax and welfare system. But the government continued to drive its expenditures downward. Little by little, it began to see the fruits of its toil.

Despite all this hardship, one of the more unusual traits of the Irish crash was the relative resignation to austerity that reigned among the general public. The formidable anti-austerity movement in Greece was large, vocal and often violent. Demonstrations in Spain were just as arresting in their scale. Tens of thousands rallied in Portugal, and countrywide protests against reform were organized in Italy.

But in Ireland, with the exception of some scarce but unwavering critics, only small unionized pockets of the workforce mobilized to express their horror at the new reality brought about by recession. Even this occurred infrequently, mostly in the early part of the austerity period.

The protests in Dublin were well-attended, aided by the unions’ ability to transport marchers from distant regional towns. Small anarchist groups often sought to hijack the marches, but the disproportionate police response, featuring riot squads and dogs stationed on street corners, suggested that the authorities anticipated large, heated protests that they feared might spiral out of control. Such protests never came. In fact, there were fewer than 10 large-scale protests between 2008 and 2013, including actions by civil servants, the Irish Congress of Trade Unions (ICTU) and the U.S.-inspired Occupy movement in 2011.

It is a further peculiarity of the Irish experience that the nominal “recovery” would coincide, in 2014 and 2015, with the first emergence of a real protest movement, characterized by a widespread and newly aggressive revolt against a number of reforms announced by the ruling coalition. However, the impact of this movement remains to be seen, and its ability to generate support will depend on how widely the effects of the recovery are felt.

Despite the Recovery, Punitive Taxes Continue

The public’s interest in the rest of Europe, Greece and the international markets has not subsided totally, but in the past two years of alleged recovery, Ireland has once again become preoccupied with itself. One item on the government’s agenda has surprisingly galvanized opposition above all others: domestic water charges. And like many other policy changes implemented since 2010, the government’s attempt to charge the public for water can be traced back to the bailout.

Irish households had paid for water out of general taxation since 1996, when a “local service” levy that covered water was abolished. The introduction of a water charge was floated by Fianna Fail in 2009, but never came to pass. In 2010, however, water charges were recommended in the IMF memorandum of understanding on the terms of the bailout.

In 2012, the state set up a new company, Irish Water, to manage the water charge and the installation of water meters. An IMF report published later that year said that Ireland should take in 500 million euros in charges in 2015. But there was no way for the IMF to foresee the administrative and managerial failings that would ensue at Irish Water, nor the vehement rejection of the charge by many Irish communities.

Among the numerous false starts for Irish Water, the date originally set for charges to commence had to be deferred. In April 2013, it was announced the charge would be delayed to January 2014. In November 2013, the billing date was pushed to January 2015. The first charging period was also ultimately suspended: It had been originally due to cover October, November and December 2014, but in mid-November the government said no charge would apply until after Christmas.

In the meantime, week after week, the press aired damning revelations about the new company: millions paid to private consultants; a convoluted and thus reviled bonus structure put in place for staff; and additional claims by contractors installing the meters to cover higher incurred costs.

Meanwhile, a number of political and civil society groups have advocated a boycott of water payments, and protesters have been taken to court for breaching injunctions put in place to stop them from interfering with the installation of the household meters on their streets. In one particularly ugly fracas, the deputy prime minister, Labour Party leader Joan Burton, was trapped inside her car by protesters against the water charges for more than three hours while visiting a school in north Dublin. Outrage over the water charges ultimately forced the coalition to scrap another flat fee it had planned to introduce, a broadcasting charge that would have extended the TV license fee already in existence to increasingly popular Internet-based broadcasting.

There are many theories as to why the popular backlash against Irish Water has been so fiery, but the most compelling has to do with timing. Recent economic data has been assuring the Irish public that the worst is over, but punitive taxes continue. If Ireland was indeed, to quote Finance Minister Michael Noonan on the occasion of the bailout exit, “handed her purse back,” it does not necessarily feel that way to large subsets of Irish society.

Gradual reinstatement of some public benefits has taken place, but vast gaps remain, leading to a widespread perception that the government is unable or unwilling to spread the wealth and give the impoverished a break.

The nascent economic recovery has helped to staunch the outflow of emigrants, another impact of the recession. Before and during the Celtic Tiger years, Ireland had been a magnet for immigration, and both workers and asylum-seekers came to Ireland in the tens of thousands. The rate of immigration peaked in 2006 and 2007, with more than 100,000 arriving to the country in each of those years, attracted by the third-lowest unemployment rate in Europe. But between 2009 and 2014, 228,400 Irish people emigrated, mostly to English-speaking countries like the United States, the United Kingdom, Canada and Australia.

One benefit of this mass emigration was to take the edge off Ireland’s unemployment statistics. At its height, in 2012, unemployment stood at just over 15 percent. In November 2013, it fell to 12.8 percent, the lowest rate reached since 2009. Today, the rate is 9.9 percent. The effects of population decline have been most marked in rural counties; the closure of basic amenities like banks, post offices and grocery stores in towns and villages that offer little prospect of employment is an ongoing trend. The regions have suffered much more than the major cities; Dublin, Cork and Limerick have been insulated by foreign direct investment and the establishment of global and European hubs by multinational companies.

As emigration slows and the rate of employment gradually improves, the country has a chance to retain a higher percentage of workers, including university graduates, than it has in recent years. Piecemeal improvements to technological and scientific education during 2012 and 2013 also ought to yield benefits in the form of a skilled workforce that matches the incredibly well-resourced multinational companies that have set up their bases in Ireland, in part because of the low rate of corporate taxation.

The presence of such multinational giants in Dublin is one reason the capital’s economy is returning to good health, albeit at a rate that outpaces the regions and the periphery to a worrying extent. At the same time, the manipulation of the tax system by companies like Apple has come under close scrutiny in recent years. But the present government seems to be content leaving the emergence of a “two-tier economy” and the many troubling issues it raises to the next government, which will be determined in general elections by next April at the latest. The question of what government that will be remains open.

New Political Currents

Recent opinion polls paint a muddled picture of the Irish political playing field. In March, the government’s approval ratings jumped by six points, according to polling by Ipsos and the Irish Times, due mainly to the strengthening economic recovery. At the end of April, however, public support for the coalition dropped by four points—both Fine Gael and Labour were down two points, according to separate polling carried out by Red C, as the sheen of the celebrated recovery was tarnished by politically damaging scandals.

Around the same time as the April poll, the ruling parties were hit by revelations surrounding the sale of an engineering company, Siteserv. It turned out that 100 million euros worth of Siteserv’s debts to the state-controlled Irish Bank Resolution Corporation (the former Anglo Irish Bank) had been written off. The multimillion-euro loss to taxpayers has resulted in widespread public anger and calls for a full investigation, after documents released under freedom of information legislation revealed civil servants’ misgivings about the sale.

The big winner in the latest opinion poll was Sinn Fein, the left-leaning nationalist party, which in fact has been gaining for some time. Sinn Fein, which operates both in the Republic of Ireland and Northern Ireland, has managed to curry considerable favor with the electorate in recent months, as voters are open to any available political alternatives to the parties that have dissatisfied in power for the past seven years.

Sinn Fein is reaping residual benefits from the fact that it had no hand in the policies that brought on the financial crisis or the initial responses to it. As a result, it has managed to gradually win over voters in a way that Fianna Fail, in power during the bank guarantee and responsible for the subsequent bailout, has not been able to do. Though Sinn Fein and Fianna Fail are not natural coalition partners, an alliance between them in upcoming general elections is a possibility, if one that neither party wants to discuss openly.

But Irish voters appear to be veering away from the establishment parties, giving upstart anti-establishment formations a shot at taking power. Earlier this year, former Fine Gael Junior Minister Lucinda Creighton, now an independent, formed a new political party, Renua Ireland. Another independent parliamentarian, Shane Ross, has begun assembling a new entity, the Independent Alliance. Ross has been at pains to say that what he is building is not a political party like Renua, but rather a new way of fostering unity among independent members of Parliament who share the same convictions and occupy roughly the same part of the political spectrum, somewhere to the right of center.

Irish voters have traditionally been ambivalent toward the further reaches of the political spectrum, with the dominant parties all tending toward the center. While there are a number of minority leftist parties—People Before Profit, the Anti-Austerity Alliance and the Socialist Party, among others—there are none on the right.

Significantly, the political extremism that has taken hold and attracted substantial populist followings throughout Europe since 2007 has been absent in Ireland. Nonetheless, the ruling parties have expressed concerns. At the World Economic Forum in Davos earlier this year, for instance, Kenny spoke warmly about recovery, but warned that “it’s very easy to lose all that hard-won gain and recovery by drifting towards a sense of populism, without clarity as to what that might deliver.”

He was likely referring to the traction gained by the anti-water-charge movement, as well as to the increasingly effective methods of organizations such as the New Land League, a patchwork alliance aimed at defending property from lawful bank repossession. Inspired by the Land League, an organization that defended exploited and downtrodden tenant farmers across Ireland in the late 1800s, the New Land League has become a thorn in the side of the legislature and the judiciary, making frequent news headlines and seducing voters who find themselves fed up with the status quo.

Nevertheless, time and again, the Irish have proven resistant to change. A 2012 Gallup poll, taken during one of the toughest years of the recession, found that 54 percent of Irish respondents elected to describe themselves as “thriving,” 43 percent opted for “struggling” and just 4 percent for “suffering.”

The fiscal uncertainty and grave financial challenges endured by Ireland since 2008, while unique in their genesis and arguably in their severity, were certainly not the country’s first episode of economic strife or hardship. The 1980s were an exceptionally bleak time for Ireland, and prior to that, the country had to spend decades weathering the effects of partition. Yet at no point during these difficult times did the political picture alter in any sweeping or meaningful way. It will be interesting to see whether the political inventiveness, lateral thinking and creativity that have emerged in the past year will make their way into voters’ psyche by the 2016 elections.


According to a 2013 report published by the National Economic and Social Council, Ireland’s crisis revealed “that past progress was less comprehensive and less sustainable than believed: we did not adequately address non-participation and disadvantage in the boom; our relationship to the international system has been revealed as more one of vulnerability and dependence than we thought; and, our overall system of collective decision-making and public governance has been shown to be extremely weak.”

Learning the necessary lessons from the recent past could stand to serve Ireland best in the years ahead. In the aftermath of the bank guarantee, the bailout and the hardships that followed, the public must come to realize that the soaring sensation enjoyed during the boom was just that—a sensation, credit-fueled and ethereal.

Whatever government comes next must have the strength of conviction to go back to basics in a heady and increasingly competitive global environment, in which there is plenty of ground to be made up. The prudence and patience summoned by policymakers during Ireland’s gloomiest times will need to endure for a number of years to come before the confidence of one economic report, one international investor or one ruling political party can translate into the confidence of the Irish public.

Siobhán Brett is a journalist who covered the Irish economy from 2011 to 2015 for a national broadsheet newspaper, the Sunday Business Post. She is now living and working in New York City.