GLOBAL FINANCIAL CRISIS: by Peter WestmoreNews Weekly
Ireland follows Iceland in financial meltdown
, September 19, 2009
Following the international financial crisis which has forced Latvia, Hungary, Romania, Iceland and Ukraine to receive full-scale bailouts by the International Monetary Fund (IMF) this year, Ireland has become the latest European nation to feel the full impact of the collapse in its financial system.
The economic crisis is now threatening to undermine the political integration of Western Europe, one of the most important projects of post-war Europe.
In a matter of weeks, Ireland will hold a referendum for a second time on whether to ratify the Lisbon Treaty which is designed to put into effect the European constitution giving Europe an elected president, a parliament with increased powers and a more unified foreign policy.
To take effect, the 27 countries of Europe have to give unanimous support to the Lisbon Treaty. So far, 26 countries have carried parliamentary resolutions in favour, but the people of Ireland rejected the treaty in 2008. Subsequently, the Dublin Government decided to recommit the referendum to voters.
Ireland's financial collapse is the result of Ireland's economic integration into the European Union in the 1980s. To attract capital and industry from abroad, the Irish Government embarked on policies which turned Ireland into the Celtic Tiger.
It slashed business and personal taxes, reduced import duties, subsidised foreign investment and adopted the euro, giving it access to a much bigger capital market and enabling it to enjoy increased investment from Europe and the US and the low interest rates set by the European Central Bank (ECB).
Even its long-suffering agricultural sector flourished on the back of EU subsidies.
In 2004, the Economist
declared that the country's low-tax, high-growth economy, its high-quality education and natural beauty gave it an overall quality of life unmatched anywhere in the world.
Low taxes and low interest rates lured foreign multinationals, notably high-tech giants such as Apple, Dell, Intel and Google, pharmaceutical firms and merchant banks, which chose Ireland as a platform from which to operate in the euro-zone. A new tax rule, Section 23, encouraged developers to build, by allowing them to offset construction costs against tax. With banks offering low-interest mortgages with no money down, Ireland's construction industry exploded.
A housing bubble of unprecedented proportions followed. Bank lending, mainly to developers and home-owners, rose by 30 per cent annually. Household debt as a percentage of GDP jumped from 60 per cent to almost 200 per cent, the highest figure in the developed world.
After the US property bubble burst in 2007, the contagion spread from the US housing system to the American financial system, and then across the Atlantic to Europe.
Almost immediately, there was a crisis of confidence in Ireland, where the government cut taxes and increased spending.
The Irish financial crisis really hit a year ago, with banks facing insolvency as a result of the sudden and massive collapse of property values.
The government budget accelerated into deficit, and the government itself, unable to spend its way out, was forced to cut spending sharply. In October 2008, the government announced an expected deficit of €15 billion ($30 billion).
But a further decline in the budget outlook led to a subsequent interim budget in April 2009, with a rise in taxes and cuts in spending, saving nearly €4 billion ($8 billion) from the forecast budget deficit of €20 billion ($40 billion).
Additionally, the government announced the establishment of the new National Asset Management Agency (NAMA), to acquire bad debts with a face value of €90 billion ($180 billion) from the Irish banks, in order to make them solvent.
Shares in the Bank of Ireland, which traded up to about $37 in 2007, can now be bought for about 25 cents.
The crisis brought down many of Ireland's best-known businesses, including the world-renowned Waterford Crystal which collapsed into bankruptcy.Emergency budgets
From the vantage point of London, Ambrose Evans-Pritchard wrote in July, "Events have already forced Premier Brian Cowen to carry out the harshest assault yet seen on the public services of a modern Western state.
"He has passed two emergency budgets to stop the deficit soaring to 15 per cent of GDP. They have not been enough. ...
"A further 17,000 state jobs must go (equal to 1.25m in the US), though unemployment is already 12 per cent and heading for 16 per cent next year.
"Education must be cut 8 per cent. Scores of rural schools must close, and 6,900 teachers must go." (Daily Telegraph
, July 18, 2009).
Bad though things now are, they seem destined to become worse. As other nations in Western Europe (including Germany) weather the global crisis, the European Central Bank will push up interest rates, while countries like Ireland will be forced to increase taxes further to cut their mountainous deficits.
At that point, the pressures inside the European Union will become almost impossible to manage.