The Missing Economic Question in Independent Ireland

The Missing Economic Question in Independent Ireland

L. McDonagh: Irish Economics

SINCE THE financial crash of September 2008, the independent state of Ireland has plunged into a period of intense and painful soul-searching. It’s far from the first time that Ireland has had to deal with the results of bad economic policy: for most of its independent lifetime, a succession of governments has proven incompetent at governing the country’s economy. This basic lack of competence can be seen in the legacy of economic mismanagement left by virtually every Irish government since independence. The disastrous decision by the Irish government in September 2008 to guarantee the debts of privately owned banks topped off that legacy, leading directly to the economic intervention by the EU and IMF over two years later, in November 2010.

From 1922 onward, there is not one Irish government that economic historians can judge kindly. For the greater part of the twentieth century, Ireland was an economic basket-case, exporting thousands of emigrants each year to the growing economies of Britain and the United States. The country exported little else. The economy did experience a number of peaks throughout the twentieth century—for instance, the country had a brief economic revival in the 1960s—but they were followed by deep troughs: the economy completely collapsed again by the late 1970s. By and large, independent Ireland experienced a fairly consistent downward spiral of ignominy, right up until the late 1980s, when unemployment reached 20 percent. However, during the 1990s and 2000s, as is now well-known, the economy went through a “tiger” period of rapid expansion. Ireland became known as Europe’s economic “miracle.” As is equally well-known now, however, the economic miracle was more an economic “mirage.”

In September 2008, Ireland faced a crisis similar to the one that faced the governments of Britain and the United States. Large banks, which were crippled by large debts arising from the property bubble, were threatening to fail completely. The Irish government, like the U.S. and British governments, undertook bailouts in order to stabilize the banking system, but there was one major difference. Unlike, for example, the TARP measures in the United States, which pumped a set amount of money—$700 billion—into the financial system, the Irish government had no idea what the actual cost of the “bailout” measures would amount to. When the United States and Britain bailed out their banks, it was a gamble of sorts, but it was a gamble based upon knowledge of most, if not all, of the facts. The crippled banks in Britain and the United States told the government the size of their debts, and the governments signed off on them. The Irish government, on the other hand, made a blind gamble and lost it all.

On September 29, 2008 the Fianna-Fail-Green Party coalition government made the decision that the state should guarantee the debts of the banks without exception, even including the banks’ subordinated debt (which promise high returns, but come with higher risks). In the aftermath of this initial guarantee, the Irish government arrogantly boasted that it had secured the “cheapest bailout in the world.” It is clear now that the government did not know what the cost of the decision would be. Unforgivably, it took two years for the Irish government to publish the actual estimated cost of the September 2008 guarantee. The figure it gave in September 2010 was close to €50 billion—a huge cost for a nation of just over four million people.

When compared to the bank “bailout” in Ireland, the “bailouts” in Britain and the United States seem prudent. The governments of Britain and the United States made their bailout decisions with the knowledge that they would, in all likelihood, be able to afford the total costs of their respective bailout bills. In fact, there is every sign that the eventual cost to both countries will be significantly lower than originally estimated. The government of Ireland made the “bailout” decision without knowing whether the state would have the capacity to pay the associated costs. If the government had assessed the situation with any basic level of competence, it would probably have asked the EU and IMF for assistance in September 2008, instead of pointlessly and disastrously dragging out the situation for two years. The 2008 guarantee was not only a colossal waste of money for Ireland, but also a colossal waste of time—potential time for economic recovery that Ireland simply could not afford to lose. Since the financial crisis, unemployment has exploded to 14 percent, and the overall economy is still shrinking. Iceland, on the other hand, which did not accept state responsibility for all the bad loans of its banks but did accept the assistance of the IMF much earlier, has now officially moved out of recession.

The botched bailout of 2008 is an unfortunate, but not untypical, example of Irish governmental incompetence. This lack of competence was alleged even at the time by economists such as Morgan Kelly and David McWilliams, but the government shrugged off their claims. Now Ireland must face the unfavorable terms of an international economic intervention, spearheaded by the EU and the IMF in November 2010. In order to secure the EU/IMF package, the Irish government had to hand over one of its last remaining assets, the National Pension Reserve Fund, which amounts to €17.5 billion of the €85 billion package. The remainder will have to be paid back to the EU/IMF lenders at the barely affordable interest rate of 5.8 percent. The rescue package was approved on December 15 by a vote of eighty-one to seventy-five in Irish parliament, with the coalition government supported by three independents. Given the complete and utter incompetence of the Irish government at handling the economy, it is no surprise that some Irish people actually welcomed the EU/IMF intervention, even though the seemingly externally imposed bailout has severely dented Ireland’s national sovereignty.

ALL OF this raises a deeper, darker question, and one which goes to the heart of Irish nationalism. Does the incompetence of the Irish government reflect the incompetence of the Irish electorate as a whole? After all, large majorities have consistently voted to elect the same politicians from the same old parties, Fianna Fail and Fine Gael. These parties date from the 1922 nationalist split over the “Free State” agreement with Britain. The 1922 agreement provided for partition between the six counties in the north, which became Northern Ireland (and which remains part of the United Kingdom of Britain and Northern Ireland), and the twenty-six counties to the south, which became independent Ireland. Following the 1922-23 civil war, which was fought between the pro-treaty and anti-treaty sides, Fianna Fail took an anti-partition stance, with Eamon De Valera as the party figurehead. Fine Gael’s members, led by Michael Collins, accepted the 1922 agreement with Britain. Fianna Fail has traditionally been the most successful of the two parties, and it has been the majority party in government since 1997. However the economic policies of both parties have always been virtually indistinguishable—for example, Fine Gael did not oppose the September 2008 guarantee.

Irish nationalist “politik” has poisoned Irish politics for the entire period since independence. Even today, there is little substantive difference between the economic and social policies of Fianna Fail and Fine Gael. The only real border between the two parties remains the bitter historical split that occurred almost a century ago. In contrast, in Britain and the United States, the two main parties have been traditionally divided by economic and social ideologies—socialism or liberalism? Keynes or Hayek? In Ireland, politics have focused first and foremost on “the nationalist question.”

From a purely economic perspective, Irish independence has arguably proven to be a pretty good deal for Britain. For instance, Ireland’s almost complete lack of industrial capacity has made it an extremely reliable buyer of British exports. In fact, Ireland is Britain’s biggest export market—amounting to around 5 percent of its total exports. Britain has also benefited hugely from Irish immigration, both with respect to the provision of cheap labor in the building industry during the mid-twentieth century, and with respect to the “brain drain” of young talented graduates which continues in earnest today. Finally, and most shamefully, Britain stands to make a total of £400 million in interest from the generous bilateral loan of £3.25 billion that is to be provided to Ireland as part of the EU/IMF-brokered bailout.

Yet there’s no better time than the present for parties in Ireland and Britain to work together. Only now, with the advent of the biggest crisis in the state’s history, has the Labour Party in Ireland started to gain ground on the two major parties. Labour has traditionally been a third party, often in coalition, but rarely in power. Its leader Eamon Gilmore was the only party leader who opposed the September 2008 guarantee, noting that its unknown cost was a major cause for concern. Arguably, the Labour Party provides the best opportunity for a progressive political force to emerge in Ireland. It remains the only major party in Irish politics founded upon economic and social ideology, rather than a merely nationalist one. However, if the Labour Party is to succeed in Ireland it must shake off its former identity as a niche party. Arguably, an effective way to do this would be to do more to seek expertise from, and to share experiences with, the British Labour party. They are sister parties, after all. With the Labour Party in Britain seeking to re-group following its 2010 election defeat, an interesting opportunity has arisen for both Labour parties to seek guidance and support from one another. In light of the corrosive effect that nationalism has had on Irish politics, a little bit of internationalism can only be a step in the right direction.

Luke McDonagh is a PhD candidate at Queen Mary, University of London.