Celtic Tiger becomes the sick cat of Europe

On January 27, the lower house of the Irish Parliament approved by a vote of 81 to 76 legislation imposing savage austerity measures on working people. The Finance Bill 2011 was supported by the conservative Fianna Fail government of PM Brian Cowen as a condition for a €85 billion rescue package provided by the European Union and the Washington-based International Monetary Fund.

Cowen now heads a minority government, with his Green coalition partners having quit his government two days earlier, while pledging to support the finance bill, which brings into law the austerity measures announced in last December’s budget. Electoral support for Fianna Fail has plummeted from 41% in the 2007 general election to less than 13% since the December 9 austerity budget was approved.

While the main opposition parliamentary opposition parties - the centre-right Fine Gael and the Labour Party - voted  against the bill, they have accepted the main features of the EU-IMF imposed austerity plan. Their combined electoral support is currently over 56% and they are likely to form a coalition government following the March 11 general election, called by Cowen.

Draconian austerity measures

Among the measures in the austerity plan are the removal of 24,750 positions in the civil service (8% of the workforce); newly recruited public sector employees will earn 10% less than existing employees; a reduction of social transfers resulting in lower family and unemployment allowances; a significant reduction in the health budget; the government-funded pension scheme is to be reduced in value by 10% for new entrants; students are to pay fees for higher education; an increase of value-added sales tax from 21% to 23% in 2014; creation of a real estate tax (affecting half of the households that were formerly tax-exempt); a 11% reduction in the minimum hourly wage.

Altogether, the austerity plan will take 11% of national income out of the pockets of the working people of the Irish Republic. This draconian plan aims to get Ireland’s government budget deficit down from 12% of GDP to 3% by 2014 and to stabilise the gross public sector debt burden at something like 120% of GDP.

Ireland is now the second European Union country to receive an EU-IMF “bailout”. In May, Greece accepted €110 billion from the EU and the IMF following a similar concerted campaign by the money markets and rating agencies to downgrade Greek government bonds and push the country towards bankruptcy. Following the Greek bailout, the EU and the IMF put together a €750 billion emergency fund. At the time, EU governments claimed that the fund was a “protective umbrella” for the euro. They said they did not expect other EU countries to resort to it. Six months later, Ireland is doing just that.

The bailouts of Greek and now Irish governments mean effectively that both governments have yielded control of their budgetary policy to unelected officials from the EU and the IMF. Over the past year, Ireland has already introduced the most comprehensive package of social spending cuts in Western Europe. As a result, wage levels in the country have already plummeted by 20%, and the unemployment rate, down to 5% in the middle of the last decade, is now at a depression-level 14%. Now the EU and IMF are demanding a further round of draconian spending cuts, which will have devastating consequences for Irish working people.

Collapse of the Celtic Tiger

Prior to the 2008-09 Global Financial Crisis and the 2008-09 Great Recession, Ireland was hailed by partisans of neoliberal capitalism as a model to be imitated. The “Celtic Tiger” had an economic growth rate higher than the EU average. This was based on attracting foreign, particularly US computer companies, to set up operations with a ridiculously low corporate tax rate of 12.5%. By the mid 2000s, Ireland, with a population of no more than 4.5 million, had become the world’s leading exporter of computer software and the source of a third of all personal computers sold in Europe. Foreign-owned, particularly US-owned, companies accounted for 93% of Ireland’s exports.

In January 2002, Ireland joined the euro zone. This altered the way Irish banks did business, as was summarised by the November 28 New York Times: “Before Ireland joined the euro, its banks tended to do business the old-fashioned way, financing their lending through the deposits they took in. Once in the euro zone, banks were suddenly able to borrow huge sums of money inexpensively on international markets with nearly no exchange rate risk, an activity that was barely regulated by policy makers. With easy access to these funds, banks like Anglo Irish lent huge amounts to prominent Irish developers, leading to a frenzy of overdevelopment.”

In the five years from 2003 to 2008, the net foreign borrowing of Irish banks increased from 10% to 60% of GDP.  Lending standards were driven down to entice prospective homeowners, many with low or no credit history, much like the subprime phenomenon in the US. In 2005, the New York Times described Ireland as the “Wild West of European finance”. The greed and recklessness of the Irish banks set off a credit-fuelled housing construction boom. In 2004 80,000 new homes were built in Ireland (by comparison, in the same year, in the UK, a country with 15 times Ireland’s population, 160,000 new homes were built).

When the Global Financial Crisis blew in from Wall Street in 2007-2008, Ireland’s commercial and residential property market collapsed, with prices falling 50-60%, way more than in the US. Exports were decimated in the global Great Recession of 2008-09 and the Irish banks were left exposed to huge bad debts that they could not absorb. They went bust.

The Irish government then guaranteed all deposits and debts in the six main Irish banks and financial institutions, effectively nationalising their debts. As a result, the budget deficit rose from 14% of GDP in 2009 to 32% in 2010. More than half of this was due to the massive support given to the banks: €46 billion in equity and €31 billion in purchases of toxic assets. In September 2008, Ireland became the first eurozone country to officially enter recession, as the economy contracted by 1.7% in 2008 and 7.1% in 2009.

The €85 billion EU-IMF loan to the Irish government has nothing to do with charity. According to Germany’s central bank, the Bundesbank, German banks are among the Irish banks biggest creditors, with a total of €166 billion, much of it in the form of risky short-term loans. In effect, the EU-IMF loan is a bail out of the Irish banks’ German, French and British bond holders, a loan that the working people of Ireland are being forced to pay for in jobs, wages and social services.