Irish Economic Crisis
Boom and Bust. After joining the EU, Ireland appeared to have an economic miracle - rising investment, growth and rising living standards. At the start, much of this was based on a solid foundation. Investment helped lift Irish living standards. But, unfortunately, the positive growth led to an unsustainable boom. Banks got carried away at the prospect of continued growth. Banks relaxed their lending criteria and reduced their liquidity ratios. This led to a boom in construction and housing. When the economy turned, many investment projects looked too ambitious. Firms lost money and this led to record bank losses. The boom had turned to a bust, and the government was forced to bailout the Irish banks.
The combination of bank bailouts and economic downturn led to a dramatic collapse in tax revenues and need for more welfare payments. The Irish budget deficit shot up from 3% of GDP to over 12% of GDP (35% if you include bank bailouts)
Faced with a recession and large budget deficit. The Irish government felt they had no choice but to tackle the deficit through higher taxes and spending cuts. Remarkably the Irish electorate largely accepted these stern measures such as public sector wage cuts of 5%. Yet, these emergency measures exacerbated the loss in confidence and led to lower spending and investment. The consequence of the austerity measures was that the Irish economy suffered a double dip downturn.
Ironically, the harsh austerity measures failed to reassure nervous European bond investors. Bond yields on Irish bonds have continued to grow to crippling levels. The result is that Ireland is facing the need for a bailout and more austerity measures. This is the last thing the economy wants, but, given constraints of being a Euro member there is little alternative.
Lack of Alternatives
The Irish largely see EU membership as an unqualified success and by implication, membership of the Euro a good thing. Unfortunately, this crisis has shown the limitations of being a member of a single currency and common monetary policy.
Usually, a country in the situation of Ireland which needed to cut budget deficit in times of recession, would at least have monetary policy to offset some of the decline in spending and investment. For example, they could have followed UK and pursued quantitative easing. This would have increased demand and lowered their exchange rate. This depreciation would have helped domestic firms exporting.
But, Ireland doesn't have this option. Membership of the Euro means you have to follow the unpalatable options but, there isn't much else you can do to help.
The situation looks grim. There may be some crumbs of comfort. Recent figures on investment spending looked promising. The Irish crisis is ironically going to weaken the Euro. But, it may not be enough to pull the Irish economy back to growth without much economic pain.
There is also a sense of unfairness. The banks which created a large part of problem through irresponsible lending have been rescued unconditionally by government. But, it is ordinary people who are experiencing pain of wage freezes, job losses and spending cuts.
If it was as simple as leaving the Euro, I would tell them to do it tomorrow. But, leaving the Euro is not that simple. (why difficult to leave Euro)
The Irish economy shows
- The dangers of allowing a boom and bust in bank lending
- the difficult of cutting budget deficit in recession. - Measures tend to be self-defeating unless you have some very powerful antidote.
- The difficulty of adopting a common monetary policy for an area as diverse as the Eurozone.
Ireland Economic Crisis Essay
The Euro zone crisis has impacted many countries such as Ireland, Portugal, Italy, Spain and Greece. Many say the Euro zone crisis was triggered as a result of the initial Global Financial Crisis that started in the United States in 2008. However, these countries, and Ireland in particular, would not have been sent into a recession if their own economies and debt were in order. Ireland was the first state in the eurozone to declare tit’s entrance into a recession.. However, on November 29, 2010 the European Union, the International Monetary Fund and the Irish state agreed to a €85 billion rescue deal for Ireland, but there were certain policies Ireland had to implement in order to receive it. The question left to be answered is whether these policies and conditions have actually helped Ireland dispose of their financial hardships or at least recover to the point of economic and political stability. As of 2013, Ireland is on track to leave the bailout program in December.
The period of high economic growth rate in Ireland was between 1995 and 2002. It was named the period of the Celtic Tiger and it contained increasing productivity in Ireland, a very strong fiscal position of the Irish state was a low unemployment rate fell of around 4% “("Ireland's Economic Crisis: How Did It Happen and What Is Being Done about It?"). However, not long after, from 2002 onwards, the boom Ireland was experiencing had begun to shift. Initially triggered by the global financial crisis of 2008, Ireland was in trouble. For example, “labor productivity was no longer increasing, inflation was high and growth in GDP became related to the housing market” ("Ireland's Economic Crisis: How Did It Happen and What Is Being Done about It?"). While at this point the state appeared strong, this was not the case because most of the revenue the state took it was related to the property market. Property related revenues included capital gains tax, a large amount of VAT paid by developers and income tax paid by workers in a very large construction sector. The tax base was very dependent on the housing boom.
However, even with trouble on the horizon due to the housing market, Ireland did not take any action and continued funding expensive capital projects, increasing public expenditure and they rose spending in many other areas. This, along with the fact that the balance sheets of the Irish grew large relative to the size of the economy, was damaging when the housing bubble finally bust.
Thus, when the housing market finally reached its peak in 2007, the tax revenues began to decline dramatically because they were strongly based on the capital gains tax, the VAT paid by developers and the income tax of construction workers. Thus, with the fall of the real estate ,market, new home completions fell, and by 2008, Ireland experienced its first significant increase in unemployment in 15 years ("Ireland's Economic Crisis: How Did It Happen and What Is Being Done about It?"). In...
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