The Republic of Ireland is in the throes of a huge economic crisis that has thrown thousands out of work and into the streets; and is also pushing untold thousands of young people to emigrate to other nations.
With massive debts to repay, Dublin was compelled to accept huge bailouts from the European Union and International Monetary Fund. In exchange, the Irish government has cut spending, slashed jobs, eliminated many social programs, and hiked taxes.
Of course, this same sad saga is playing out across the Euro Zone, particular in Greece, where the crisis may actually be even worse.
However, Ireland and the Irish hold a special place in the hearts of the U.S. and U.K., given the large well-established Irish communities in these countries. Despite Ireland’s small size and population, its people have long had a tremendous influence on the culture and political life of the US, UK and several other countries.
Moreover, Ireland has long had a history of emigration anyway (from famine, persecution, war, etc.).
International Business Times spoke to an expert on Ireland to discuss the present crisis and how it differs from previous periods of economic hardship on the Emerald Isle.
Professor Cillian Ryan is Dean of Liberal Arts & Sciences and the Jean Monnet Chair in European Economics at the University of Birmingham in the UK.
(Continued from Part 1)
IB TIMES: If Irish youth abandon the country en masse, could you foresee small towns and villages simply vanishing as the remaining residents age and die off? RYAN: We have a long way to go before we reach the levels of the 1960s when the Irish population hit a historical low of 2.8 million. While the population slowly recovered during the next 20 years, the expansion was largely around the cities (particularly the Dublin region which expanded from about 750,000 to 1.5-million. During this period, small towns in the South-West, West and North-West and Midlands really struggled. Getting Gaelic football teams together was a real challenge in some areas. While the population overall has now risen to 4.2 million, the bulk of this is still located in Leinster [the east of Ireland which includes Dublin], with slower growth in provincial towns. Having said that, there was a significant expansion in all major towns throughout Ireland during the boom, with increases seen in the housing stock in nearly all major towns. The other point to stress is that Ireland is still a relatively young economy, due in part to the recent population growth. The question of the aging people ‘dying off’ really boils down to whether the youth emigration for ‘experience’ (both professional and social) is temporary; or whether the economy stagnates and young people stay abroad.
IBTIMES: Isn't Ireland still a popular tourist destination for many Europeans and Americans? Is tourism proving some relief from all the gloomy economic/unemployment news? RYAN: Not really. Since the high of 2007, tourism numbers fell off markedly in 2009 and 2010 (down 25 percent), due in part to the strength of the Euro against Ireland’s two major markets – the UK (the pound sterling was down about 33 percent on the Euro) and the U.S. (the dollar was down about 10 percent on the Euro). Tourism figures have recovered somewhat in 2011 as the dollar has returned close to its 2007 value against the Euro and the pound has appreciated a little (to about 75 percent of its 2007 value). Costs have also been helped by a cut in the value-added tax on restaurants and other tourist activities, but the minimum wage remains high by European standards, which doesn’t help matters.
IBTIMES: Do you get the impression that the Irish regret ever having joined the EU? Or do they still think it was a good idea? RYAN: No sane Irish person would ever doubt this -- the boom of the 1990s would never have happened if Ireland had not been in the EU and the euro (although the latter might be more contested). At the time if you were a non-EU company seeking to exploit the EU single market and wanted a well- educated, numerate, relatively cheap work force, whose primary language was English (the language of international business) but who also spoke modern European languages, then Ireland was a complete no-brainer. Between 1998–2003 Ireland had the largest net foreign direct investment (FDI) flow per capita of any country in the world, four times larger than the UK, five times larger than Germany, 6.5 larger than France and five times larger than Spain. In absolute terms, tiny Ireland (with a population of less that 4.2 million) was the sixth largest destination for net FDI in the world in 2002 and 2003. In terms of FDI stock per capita Ireland, was second only to Hong Kong. All the other rationales for the Irish boom don’t really hold water. Irish corporate tax rates on overseas companies actually increased in the 1990s compared to the previous two decades (EU law forced them to harmonize overseas and domestic tax rates and EU subsidies/investment were not worth materially more than it had been for the previous 20 years without any great benefits). FDI (as a result of the EU single market), and a young educated workforce were the keys to the economic prosperity of the 1900s.
IBTIMES: Has foreign investment into Ireland ceased? Isn’t the government seeking to cut corporate taxes in order to attract more foreign investors? RYAN: There has been nearly 70 billion euros worth of investment in the last two years. After the information technology (IT) bubble burst in 2003, FDI into Ireland fell for a number of years, however since 2006; it has been recovering slowly, with the odd blip. In the last two years FDI inflows equated to 11 percent and 13 percent of GDP, respectively, and currently the stock of FDI in Ireland is 11 percent higher than it was at the height of the IT boom in 2003, and 34 percent higher than in 2000. The Irish government is struggling to maintain its corporate tax policy in the face of pressure from the EU to increase corporate taxes in line with EU norms. The French are trying to make this a condition of the EU bailout, however, the Irish are resisting strongly. I suspect nothing will come of it in real terms. If the Irish are forced to increase the headline rate, then they will simply start to give allowances for R&D, plant investment etc. Such allowances are normal in the rest of the EU (which makes accurate overall tax burdens difficult to assess) but the Irish run a pretty simple flat-rate system with few exemptions. So if they are forced to increase the headline rate I suspect they will just circumvent it with new, more generous, allowances.
IBTIMES: Can you compare the economic situation in Ireland to Greece? Is the Greek catastrophe worse than Ireland? RYAN: Greece is completely different, and much worse. In a nutshell, Greece’s problem is that it doesn’t and never has had, a reliable and comprehensive tax collection system. Before it entered the Euro it could overcome this by printing Drachmas to fund government spending. After the introduction of the Euro, Greece struggled to balance its budget, overspending by 5-6 percent of GNP per year resulting in a consistently deteriorating fiscal position. Arguably the EU or at least the banks that were financing this continuing deficit ought to have reacted much earlier to the continuing Greek deficit position. In Ireland, by contrast, fiscally, it was running a significant budget surplus from 2001 prior to the banking crisis of 2007-2008, had low levels of government debt (24.9 percent GDP in 2007), and had moved into accumulating a significant sovereign wealth fund to pay for future pensions. So Ireland was reasonably fiscally responsible. Given the healthy budgetary position the Irish government was giving generous public sector wage increases (especially to itself!) and generous welfare benefit increases. Arguably, it should have been more aware of the tenuous nature of some of the fundamentals (particularly its tax incomes relating to property, stamp duty and capital gains) and put more into the sovereign wealth fund for the rainy day.
Nobody, not the EU, the IMF nor the markets had any concerns about the Irish fiscal position prior to 2008.
IBTIMES: Tell me about the Irish banks and the crisis.
RYAN: The Irish problem was related to the exposure of its banks to property loans. The High Street banks had indeed been careless with the amount which they lent to property developers and house buyers (issuing mortgages based on generous income multiples, for example) and this would have caused considerable adjustment problems given the international financial crisis in 2007-2008 even if this had been the only problem.
However, the real problem was a private, non-High Street bank called Anglo-Irish Bank which was entirely exposed, not just to Irish, but to international speculative property deals. Despite its name and head office location, the bank did not have much to do with Ireland, was not funded by ordinary Irish depositors, but rather relied mainly on international financial markets for its funds.
For some reason, which I cannot really explain, instead of backing only the main High Street banks when the crisis broke (which as I said would have imposed some hardship but nothing like the scale of backing Anglo-Irish) and letting what was essentially an internationally-funded speculators bank go to the wall, the government opted to back all Irish banks.
The explanation offered is that they feared that a default on Anglo-Irish would provoke a default on others, even though Anglo’s position was considerably more precarious than the others and it was not a high street bank.
Thus it can be argued that the Irish are actually being asked to bail out reckless lending decisions by other international banks who could have and should have paid greater due diligence to whom they were lending. Quite why they are taking this upon themselves I am not sure, it is difficult to see how we can avoid future moral hazard problems in banking if sovereign nations bail out banks in this way, particularly banks which were not part of the ordinary fabric of the financial system.
Put another way, Anglo-Irish Bank is precisely the kind of bank that US and UK regulators wants to separate out from the High Street functions of their major banks, so that it can be excluded from government deposit guarantees. Anglo-Irish already met those conditions and should have been let go to the wall.
All in all, this means that the Irish situations is relatively recoverable, unless the high taxes it has to impose to bail out the banks (repay the IMF/EU) induces enough people to leave for other less taxed countries. If that were to happen then Ireland could go into a downward spiral of emigration of high-skilled mobile employees. In fairness that does not seem to be happening yet, and the recent inflow of new FDI (averaging 12 percent per annum) is an apparent vote of confidence in the country’s future.
By contrast Greece and Italy (both with FDI inflows close to 0.7 of a per cent of GDP in the last two years) have much more fundamental problems to address with their public sectors and tax collection systems which may take years to resolve.
Palash has worked as a business journalist for 21 years in New York.