Once known as the "Celtic Tiger" for its sustained record of double-digit economic growth, Ireland is now in the midst of a financial tsunami. Unemployment is soaring, economic activity is contracting, banks are over-loaded on toxic assets and government spending is out of control. In many ways, Ireland seems to be a microcosm of the United States, only with a Gaelic accent. However, sheer size and the status of the U.S. dollar as the world's reserve currency has delayed the full replication of what Ireland is currently experiencing. For that reason, what is occurring to the Irish economy in the present may be a window of what might soon lie ahead for the United States.
The strength of Ireland's economy during its glory years was largely based on the seeming success of the globalization economic model. International businesses, especially in the high technology sphere, set up shop on the Emerald Isle, taking advantage of a well educated, cost-competitive workforce in close proximity to the European mainland, and an economy fully integrated into the Eurozone. This globalized corporate presence ended the historic migration of Irish workers overseas, as the local economy's demands even drew immigrants from Eastern Europe into Ireland. The increase in domestic opportunities contributed to a massive explosion in property prices. Irish banks bet heavily on securitized assets, as the financial sector assumed a leading role in the Irish economy. This is a scenario we have seen elsewhere, and led to Ireland being especially vulnerable to the consequences of the Global Economic Crisis.
Since the onset of the synchronized global recession, the Irish economy has undergone a rapid contraction, erasing almost overnight the economic gains of the past several years. Unemployment in the Irish republic stands at near 11%, and is likely to get much worse. According to Ireland's Central Statistics Office, the nation's GDP shrank by 7.5% in Q4 of 2008. Added to these grim numbers hangs the dismal situation characterizing Irish banking and financial institutions; approximately $110 billion of toxic assets are eroding their balance sheets.
The Irish Taoiseach, Brian Cowen, has reacted with desperation. Recently, his government unveiled a second emergency budget. Ireland's finance minister, Brian Lenihan, submitted a spending plan that contained a smorgasbord of selective tax increases and spending cuts. These steps were taken in recognition of the dual emergency facing the Irish economy. The once "Celtic Tiger" is not only incurring massive unemployment and social distress; the collapse in revenues has driven the nation's budget deficit through the roof. The steps proposed by Lenihan sought to reduce the government's budget deficit from nearly 14% to about 10.75% of GDP. These steps were not nearly enough to comfort the worried rating agencies. Standard and Poor's has removed Ireland's coveted AAA rating, while Moody's downgraded all 12 Irish banks.
With expenditures of 55 billion euros and revenues falling below 35 billion euros, Ireland is facing the daunting paradox confronting a growing host of nations, including the United States. The politicians maintain they cannot implement draconian spending cuts in the face of severe human hardships being created by the Global Economic Crisis. Yet, mathematical realities may constrict the ability of political leaders to infinitely borrow money in order to maintain high structural deficits. With the rating agencies having made their move, the ability of Ireland to finance its deficits through the largess of the global credit market will become increasingly more problematic. It appears that the IMF may be the ultimate lender of last resort for Ireland, and that kind of assistance will impose costs of its own.
The economic catastrophe facing Ireland will cause sorrows that cannot be suppressed by a pint of Guiness. Nothing less than national insolvency threatens this once robust economy. And lest the United States pretend that the economic collapse now underway in Ireland is irrelevant to its own situation, the elements that have brought down the "Celtic Tiger" are almost identical to those now eating away at the very foundation of the U.S. economy.
Gene
Roseville, MI.
Everyone is waiting for a big auto company or computer manufacturer to locate in their state. Ain't gonna happen, as we all know. But no one sees the real promise of biotech and nanotech.
http://eye-on-washington.blogspot.com
You may want to explain that a little bit more in detail. Ireland's success is mostly one of attracting companies by offering them low taxes. How does that compare to the US, again? When did we offer low federal income taxes to corporations which wanted to set up shop here? Not to mention... when did we offer a well educated labor force?
Just sayin'...
The US did this: they gave federal income tax breaks to companies to NOT set up shop in the USA.
The real problem here is that our tax base has been far too narrow. We've had the lowest corporation tax rates and the lowest real income tax rates in the West. Some 40% of workers paid no tax, while the legally enforced minimum wage was one of the world's highest. We bolstered our tax take through property-related taxes, which have evaporated now that our housing market bubble has burst. So the entire tax system has to be overhauled. It will be gradual, but it's already begun.
Revenues falling below E35bn? That was our revenue base only six years ago, and the country was in good shape then. So there's plenty of expenditure that can be trimmed back yet, while still allowing us to maintain a decent standard of living.
Unemployment may have rocketed here - but it's at the same rate it was in 1996. We survived. We are indeed vulnerable owing to our dependence on inward investment, but that has always been the case.
So things may look grim, but we are not about to bust. The toxic debt problem is being managed. The people are still highly-educated, mobile and adaptable.
I came of age in the 1980s here, when unemployment was hitting 18%, interest rates were above 15%, inflation was at 12%, mass emigration was taking place. There were Cassandras then, as now. Reports of our demise, once again, are greatly exaggerated.
I specifically remember about 2 weeks back...the market had been gaining for days and was on an upward trend. Friday of that week, saw stocks seesawing around the break even point, but ended up a few points down. Even though stocks were up by 4-5% for the whole week, the headline on the story was something like 'stocks slump, end 4-day rally.'
Either way, folks would be wise to take full advantage of this current decline, by buying into Real Estate if they have the means. I have a few relatives who were looking to buy a summer home for the family in Dingle, Kerry a few years back, but couldn't due to high prices. They are looking back into it now.
We are all having to adjust and change.
This "mistake" which is presently being driven down our throats chokes the US no less.
Remember: "This is all about fear."
Buck up! Obama has at least made an effort to sell his shot at it. How many of us have ever seen an American President addressing European citizens in this manner, since Reagan? Sure, there was Clinton, but he was politically hobbled.
Obama has moved to the center and he's looking for world consensus... who doesn't see that?
Really? Oh, please, keep going. This is a gem.
See, I thought the economic collapse was a sobering reflection of the debt caused by our unsustainable monetary expansion, but if it all boils down to being afraid, well then I guess everyone was wrong!