ECFR: Reinventing Europe: Ireland – from interdependence to dependence
By Brigid Laffan
Since the fatal decision to bail out Irish banks in September 2008 and thus socialise bank debt, Ireland has found itself in the throes of multiple crises: banking, public finance, economic and reputational.
Although the Irish Government began a programme of fiscal consolidation in 2008, the state was so overwhelmed by the gravity of its banking and public finance problems by November 2010 that it had to reluctantly accept a rescue package from the European Union and International Monetary Fund. Ireland, having exchanged dependence on the UK for interdependence within the EU, now found itself dependent for funding on an EU/IMF Programme of Financial Support. The troika became an integral part of the governance of the state with periodic visits to check on the performance of Ireland as a programme country. This is deeply traumatic in a country that, since its foundation in 1922, has been able to meet external obligations to financial markets even when poor. As Ireland strives to return to the bond markets, it does so in the context of a eurozone in crisis, a significant shift in the attitude of its nearest neighbour towards the EU and the prospect of a step change in integration as the euro member states complete the single currency. Although this brings the “f” word (federalism) onto the agenda, in Ireland the real “f” word is simply “fix” it. Ireland is far more preoccupied with the immediate crisis than with longer term developments in the eurozone, notwithstanding their significance.
From being a model small EU member (and Europe’s “shining light” according to The Economist), Ireland’s state and society went from boom to bust it a very short time frame. Almost overnight it became a debtor, unable to fund itself on bond markets. The causes were both domestic and external. The Irish boom had mutated into a bubble driven by over-reliance upon the construction industry, negligent financial regulation, an expansion of public expenditure, wage inflation with a consequent loss of competitiveness, and the emergence of a current account imbalance. The crisis, however, was not all home grown. The expansion in credit flows, both global and within the eurozone, fuelled pro-cyclical policies and gave the state, Irish banks and citizens access to too much cheap credit. When the fissures in the Irish banking system were exposed in September 2008, the absence of a eurozone bank resolution mechanism made it a very dangerous club to be part of. The decision to guarantee the vast bulk of the banks’ liabilities, without knowing what those liabilities were, proved catastrophic. The cost of the bank bailout (approximately €64 billion) makes it one of the most expensive bailouts in history. The ECB’s post-Lehmans determination that no bank would be allowed fail in the eurozone meant that Ireland’s taxpayers and society now carry the full burden of the reckless lending of Irish and non-Irish banks in the 2000s. The 1.6 million Irish households now carry a far higher bank related debt burden relative to other euro and non-euro states. But by guaranteeing the liabilities of the banks, the Irish state rescued not only its own financial system but also the euro-wide financial system at a time of extreme vulnerability.
The cost of the bank bailout and the fiscal gap that opened up following the collapse of construction led to the €85 billion November 2010 rescue package (representing 54 percent of Ireland’s 2010 GDP). This came with a high level of conditionality, including a commitment to fiscal consolidation of €15 billion between 2011 and 2014.
With the politics of austerity scheduled to continue well into the second decade of the 21st century the response from the Irish electorate has been swift and devastating. In the February 2011 election the incumbent Fianna Fáil (which has dominated Irish politics since the 1930s) lost 24 percent of its vote and 57 parliamentary seats (taking it down to 20 seats in the 166 seat Dáil Éireann). Its junior coalition partner, the Green Party, failed to win a seat. The FF/Green government was replaced by a coalition of Fine Gael (76 seats) and Labour (37 seats), labelled a Government of National Recovery. A new central bank governor and financial regulator were appointed, and both a Fiscal Council of independent experts and a new ministry for Public Expenditure and Public Sector Reform established. To give voters a say in political reform a constitutional convention began its deliberations on 1st December 2012.
Irish society responded to the crisis with a mixture of anger, resilience, passivity, and humour. Unlike in other peripheral countries, there have not been sustained mass demonstrations or strikes. There were two large demonstrations (in November 2010 when the troika arrived; and in November 2012 with the sixth successive austerity budget), and opposition has mobilised against specific measures such as the €100 household charge. Experiences of the crisis have varied. Young people have been badly hit by unemployment (in the third quarter of 2012 the overall rate was 14.8 percent), and many have emigrated (76,300 left in 2011). Unlike in most other crisis countries retirees have not faced significant cuts. The new government entered office with a threefold pledge not to increase income tax, reduce welfare rates, or renege on commitments to public sector unions (the “Croke Park Agreement”, which trades extensive reforms for a guarantee of no further pay cuts beyond the 5-15 percent reductions in the 2010 budget). Notwithstanding four years of austerity and six austerity budgets, the Irish Government continues to command majority support (although opposition to austerity is growing). In May 2011 the Fiscal Treaty referendum was passed with 60.3 percent of the vote. The government’s ability to persuade the electorate to vote for a European treaty at a time of crisis underlines the firm majority conviction that Ireland is better off anchored in the EU, although the preoccupation so far has been with dealing with considerable domestic challenges rather than fully engaging with how Europe might integrate further in the future.
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