- Background of Irish Problems, emergence of Irish Miracle
- Bubble Problems in PIIGS era
- Low Corporate Tax attracted Manipulative Banks, Inflated property Bubble
- Housing Bubble, Lack of Building
- Euro and Money Supply Skyrocketed 2003-2007 in Irish Bubble
- Bubble Burst
- Mostly Self-Solved with Austerity Measures to Pay Back ECB money that flowed into Irish Banks
- Bank bailouts by Government through 2008-2010 tripled Irish Govt Debt/GDP
- Severe Cost cutting hit citizens hard
- 2010 ECB saved Ireland from defaults
- A generation of Grinding Austerity
- Ireland Low Taxes spur growth going forward
- 2020 post Covid-19 Prognosis
Background of Irish Problems, emergence of Irish Miracle
Ireland becoming one of DECENT IP based, tax havens
- In 1800s famines were caused by Potatoes, and the British Racists let millions starve
Millions of Irish had to emigrate, many to USA just to survive
In 1920s, 90% of economy was agriculture, and known as poor
Ireland was a truly Third World countro, with its only trading partner was UK - with exports being beef, dairy - basically at poor terms.
In 1930s the Irish saw that during the great depression, the countries that were being hit the hardest were the Capitalist ones with a free market. Meanwhile, countries under communism such as China, and the Soviet Union were actually experiencing economic and industrial growth during this time. So, the Irish statesman Eamon de Valera decided to take some of the ideas from the communist regimes. Ireland soon nationalized and monopolized a large portion of its economy, it banned most foreign investment, and put high tariffs on all goods from other countries. These policies were supposed to make the country self sufficient, and help rapidly industrialize the nation. But that is not what happened.
HOWEVER, Irish policy makers ran into was it was a tiny country, with no natural resources. This became a severe problem as unlike US, Russia and China, Ireland had few resources to industrialize or support factories, ports, and modern buildings.
Also Ireland’s population was small, its base mostly rural - even less than that of cities like New York and London.
1940s, Ireland ideologically was between the Communists and the West (BTW it hated UK due to past repression). So it was one of the very few countries that stayed neutral during world war 2. This neutrality like Switzerland helped it attract a future cross-European clientele when it became a tax haven and EU income tax advantaged country. But as these economic policies were put in place, the Irish began leaving the country at faster rates than they were before after famine of 1845. In fact between 1840 and 1950, the population of Ireland went from 8 Million all the way down to 4 Million.
The Nationalist and Socialist ideology did NOT work out - just like India suffered under Nehru's psuedo British Bohemiam ideology and Indira Gandhi's nationalization of industries. Like Ireland, India suffered with super low growth GDP growth from 1950 to 1990. Other than the mid-sixties post famine agricultural revolution, there were few bright spots in India.
In 1957, Ireland began accepting foreign investment, they slowly began opening up more to international trade, they started investing heavily into education, and they began selling off many of their state owned companies.
In 1973, Ireland joined what would become the European Union, and this was viewed as the beginning of Ireland becoming a modern economy. But, by late 70s, a combination of an oil crisis, uncontrolled government spending, Bank strikes, and extremely high taxes with upwards of 50% for the average person, led to one of Irelands worst economic downfalls in its history. Unemployment rates rose to 17%.
By 2015 it was already one of the 15 richest countries in the world.
Irish miracle causes early policies
Many parts of Ireland experienced power outages and soon the country once again became an impoverished nation when it was nicknamed the sick man of Europe.
In the 1980s the economy became so bad that the government tried a radical idea - the talat strategy where all of the political parties came together to make quick and sweeping economic reforms that would provide immediate and long-term benefits for the country.
The government cut down its borrowing of money
It cut taxes, in particular corporate taxes from 50% to 12.5% one of the world's lowest.
It tied wages to economic growth rates
It actively started seeking out foreign investment
It expanded its private sector to levels to EU levels
With these changes, Ireland by the 90s became known as the Celtic Tiger with one of the greatest economic expansions in the history of the world. From 1995 to the year 2000 Ireland's economy outpaced virtually every other nation in the world including China. The Irish saw consistent 9 to 10 percent growth rates. In the year 1987 the average Irish adult had an income that was 66 percent lower than that of the average person in the UK but just 13 years later the average Irish person had an income that was higher than the average person in the UK.
Now there are a few dozen Irish companies with revenues of over 1 billion dollars as HQ. This is amazing for a country with only about 5 million people.
Ireland's economy kept growing at higher rates for most of the 2000s and the 2010s other than the 2007-2009 great recession.
LOW CORPORATE TAX RATES. Other than the private/capitalist reforms, however the single reason for its growth was that Ireland became the preferred entre point of both domestic and international corporations due to its ultra-low corporate tax rates. This low corporate tax rate grabbed the attention of many multinational corporations outside of Ireland so companies with thousands to hundreds of thousands of employees opened up their international headquarters in Ireland over the next several decades and the list of giant companies with headquarters in Ireland rose fast. Mega MNCs worth worth more than a hundred billion dollars of sales with say 10% pretax earnings - will have 10s of billions of taxable income. If they can slash their taxes in half simply by putting global HQ in Ireland - this is a HUGE win. Apple, Facebook and Google are examples. It was not just low tax rates, as EU countries like Hungary, Macedonia, Bulgaria, Moldova and Bosnia are all European countries with LOWER tax rates than Ireland.
English speaking country - making it prefably for US and other MNCs.
Ireland had a better infrastructure
Better trade relations
A highly educated workforce
Celtic Tiger era Rise of Immigration from Southern and Eastern Europe.
Tax Havens got Wealthy
If you were to take a look at the wealthiest citizens in the world in the 1980’s, you would have seen the tax havens like Monaco, Switzerland and Luxemberg, at the top of the list, you would have seen economic powers like the united states and Germany at around 13-14th richest. And all the way down at number 28, past countries like Greenland, New Caledonia, and Andorra, would be the country of Ireland.
- 2015 GDP anamoly. They went through a year where they initially reported a 26.3 percent rise in GDP which was later revised even higher to 34.4%. Essentially got 7 years of fantastic China like growth in just one year. Apple by 2012 was funneling thirty five billion dollars in profits per year into Ireland which represented twenty percent of the country's GDP. Then virtually overnight in 2015 Apple shifted 300 billion dollars worth of IP assets and tens of billions of dollars worth of profits over to their Ireland headquarters. This was one reason why Apple single-handedly made Ireland's growth rate go from normal 6-10% to 34%. The problem was it did not benefit the Irish government finances or the Irish citizens as most of this money is not taxed or reinvested. Apple has over two hundred billion dollars just sitting in Irish banks doing nothing.
NO FISCAL DEFICIT unlike rest of EU
Ireland has a governmental budget surplus thanks to the sheer amounts of corporate money being funneled into the country.
Globalization/financialization - High Inequality - Does Not Trickle Down
In the aftermath, Ireland was forced to adopt a new way to report its economic data - using a new metric called modified gni instead of GDP. This reflects the difference between apparent paper wealth vs actual spendable per capita income. So while Ireland is wealthy i.e. in the top ten richest in the world right behind countries like the USA. But GNI dispels perception of Ireland being MUCH wealthier than the rest of the world.
It is very strange that a single MNC like Apple in some years as composing about 20 to 25% of Ireland's economic growth - so Ireland's economy is definitely artificially inflated.
Bubble Problems in PIIGS era
There was another setback as Ireland joined the PIIGS ie Portugal, Ireland, Italy, Greece and Spain as the weaker countries in Europe.
Low Corporate Tax attracted Manipulative Banks, Inflated property Bubble
The lowest corporate tax rate in the eurozone at 12.5%, attracted many banks.
With all-time low interest rates and easy credit, these banks had access to cheap credit due to the low interest rates and the backing of the euro by the political community.
MORAL HAZARD. With backing of the government "LEND BABY LEND", and hard currency of Euro, banks could and did lend great amounts, knowing that the government will bail them out.
Housing Bubble, Lack of Building
Government Tax Breaks and intervention in the housing sector through various tax breaks which fueled the property bubble. By giving out tax breaks for only one certain good, this distorts the market by making other investments, which would have been more profitable otherwise, look more expensive. However, similar tax breaks were in most developed countries to encourage home ownership.
Dearth of housebuilding over the past 10 years
Rising immigration, household incomes and sharp increases in employment (from 1.8 million in 2012 to well over 2.1 million last year),
A lucrative option of jobs in a growing economy led to a strong wave of immigration
Rents Rose Sharply - this sent rents soaring, leaving many young workers to miss out on the recovery.
Banks Lent Billions to over speculative Real estate development to 20% of GDP. The pressures led to an increase in investments in residential and commercial developments, swelling to account for a fifth of the nation’s economy. Major Irish banks went on a lending spree and the foreign borrowings for funding real estate projects also increased. The Irish economy was at its peak during this period and the reliance on the construction sector led to the formation of a property bubble.
Euro and Money Supply Skyrocketed 2003-2007 in Irish Bubble
The euro played a huge part in the Irish bubble and later crash.
The yearly growth in the money supply jumped, from a negative 6.7% in 2003 to 22% in 2006. Its main policy rate was around 13% before the introduction of the euro in the late 1990s, whereas the main refinancing rate of the ECB was as low as 2% in 2003.
The growth of Irish banking assets jumped from 7.4% in 2002 to 31% in 2005.
Total gross government debt as a percentage of GDP was 38.7% at the start of the millennium, steadily reducing to a low of 27.7% in 2007. So, government deficits and debt was not an issue till 2008.
Huge debt and Bank failures. Investors who had taken loans were engulfed in debt and the speculations arose that the banks would default on their debts. Just one bank - the Anglo Irish Bank held loans worth 73 billion euros – half of Ireland’s GDP and incurred losses of about 34 billion euros.
The bubble burst coincided with the global financial crisis of 2008 and an imminent recession The values of all the residential and commercial properties declined along with falling sales. New unsaleable flats and unfinished building sites were suddenly shut down, leaving ghost estates all across the country. People were left without a home and a job.
Unemployment from 4% to 14% in 2011. Reduction in unemployment benefits and welfare allotments compelled immigrant workers to retreat from the country.
Massive crash in Stock market. The ISEQ (Irish Stock Exchange Quotient) index tumbled, falling from a peak of 10,000 points in April 2007 to 1,987 points in February 2009.
Mostly Self-Solved with Austerity Measures to Pay Back ECB money that flowed into Irish Banks
Most of the emergency measures were internal to Ireland.
In September 2008, the government issued a 2-year unlimited guarantee for all debts, covering debt estimates of around 440 billion euros which was also approved by European countries.
A National Asset Management Agency (NAMA) was created to acquire property development loans from Irish banks in return for government debt bonds.
Ireland preponed it’s Government Emergency Budget which was due in December 2008 to October 2008.
Bank bailouts by Government through 2008-2010 tripled Irish Govt Debt/GDP
The crash caused the country’s worst period since the potato famine of the 19th century.
GNI reflects it is the most indebted countries in Europe in relation to the size of its actual economy.
Capitalist Cronies Bailed out. 41.7 billion euros were injected by the government to bail out banks. Why? They could not leave the banks, measuring more than half its GDP, collapsing in the middle of a crisis as this could have pulled the entire economy down.
However, total gross government debt as a percentage of GDP almost doubled in 2008 to 47.5% and by the end of the decade it was 83.5%.
Total gross government debt only rose when Ireland decided to bail out its banking system.
For an economy burdened with unsustainable levels of public and private debt, this economic turnaround was painfully achieved.
Severe Cost cutting hit citizens hard
- In a hasty attempt to intervene in a severe economic downturn, controversial measures like withdrawal of essential vaccines, closure of military barracks, restructuring income levies, social welfare cuts, pay cuts, etc. were incorporated in the budget. Reduction in unemployment benefits and welfare allotments compelled immigrant workers to retreat from the country.
Austerity hit citizens and taxpayers worst! Dramatic austerity measures, including steep cuts to many public sector workers’ pay, had satisfied the European Union, the European Central Bank and the International Monetary Fund that their loans would be safely paid back.
Waves of protestors hit the streets. Irish people had to bear the brunt of huge wage and employment cuts along with a major increase in taxes. Simply put, Irish taxpayers were on the hook and had to raise billions to pay off the debts mounted by Irish banks.
Easing austerity. A supplementary budget was proposed in April 2009 to address the ailing economy and a Croke Park Agreement was done for ensuring no pay cuts and layoffs during the financial crisis in Ireland.
2010 ECB saved Ireland from defaults
By 2010, the deficit became unmanageable and the condition of banks worsened as they were not able to raise finance and their debt downgraded to junk status.
The government started negotiations with European Central Bank and IMF for a rescue deal and a request for a “financial assistance program” worth 85 billion euros was agreed upon by the EU, IMF, and the Irish state.
- It was saved from bankruptcy in 2010 with a €67.5bn rescue loan, Ireland became the first stricken eurozone state to stand on its own two feet.
A generation of Grinding Austerity
The financial crisis in Ireland was a phase of grinding austerity, a generation lost to unemployment and mass emigration.
There was an agreement among the EU countries to keep their yearly budget deficits to 3%. In fact, this deal has been broken several times in the past and is difficult to maintain even in the future.
Households in Ireland are still underwater as their savings have eroded
In some areas negative equity and mortgage arrears mean the scars of recession remain. More than 8% of the population live in consistent poverty and 7% of mortgages are still more than three months in arrears. The heavily indebted mortgage holders are still struggling to hold on to their homes and are forced to live in temporary accommodations.
However, homelessness remains a major problem across the country.
Ireland Low Taxes spur growth going forward
Although public debt remains high, deficit-reduction measures and banking-related debt refinancing have stimulated economic recovery. Low corporate taxes and a talented high-technology labor pool attract foreign multinationals.
The government opposes a September 2017 European Commission proposal to increase the corporate tax rate and screen foreign direct investment in the bloc.
Increasing exports and industrial growth has enabled Ireland to stand on its own feet and it has risen to become one of the fastest-growing economies of the European Union.
By 2014 it was able to get out of the hated PIIGS acronym. Ironically UK seemed to be added and problems of Southern Europe seemed to worsen.
In contrast the remaining PIGS debt stayed and grew higher.
2020 post Covid-19 Prognosis
Yet by 2020, Ireland was in top 5 per capita incomes in the world for countries over 3m people! A lot of that is financial globalization and accounting tricks that don't trickle down to the people.