The demise of the Celtic Tiger

After almost 20 years of significant growth, Ireland’s economy began to look like a house of cards, stacked precariously on the assumption that the boom would continue forever! By 2008, the Irish economy had crashed more aggressively than almost all others affected by the global financial crisis.

To understand the causes of the collapse it is important to differentiate between the two growth stages. From the 1980s up to the year 2000 there was “true” export led growth coupled with competitive wages and inflation. After 2000, rapid growth continued based on irrational property prices and an unsustainable construction boom. This period of “false” growth resulted in Ireland being far greater exposed to the economic pressures of the global crash.

The abnormal increase in property prices during this period for a long time looked unsustainable. Yet, banks continued to relax lending standards despite increasing vulnerability. Reckless expansion by Anglo in an attempt to increase their market share resulted in them effectively failing in 2008, requiring a government bailout. Fearing a “run on the banks” authorities extended a guarantee on all Irish bank deposits, causing increased pressure on the market yields of Irish government bonds.

To make matters worse in 2008, a loss of wage competitiveness resulted in the unemployment rate more than doubling over a one year period (5% to 13%). Ireland inevitably started to experience a fiscal crisis with tax revenue being far less than anticipated (roughly 14%). Nevertheless, government spending continued to increase which worsened the deficit at such a crucial time.

It was not surprising that Ireland would be somewhat exposed to a global crisis, considering the economies dependence on exports and forgin direct investment. But, the Irish crisis from 2007 was not simply conditional on global factors. A home grown banking crisis, a loss in wage competiveness and a tax structure far too dependent on the continuity of the boom would all have most likely ended in a recession even without the global downturn.