This question has been on my mind quite a bit after spending two months home in Ireland following five years in the United States.
The physical appearances are positive. A new terminal is moving rapidly toward completion in Dublin Airport. The road system around my own town of Dunboyne is undergoing a transformation greater than anything that happened in the last two centuries, and a rail service , that closed when I was a small child, is on the way toward being reopened. Real wealth has been built up by many families whose homes have been reequipped with modern conveniences of all kinds , and most of those gains have been preserved despite the 40% fall in house prices. Meanwhile the shops are full, and a tough pay and welfare cutting budget apparently has been accepted with remarkable maturity by the electorate.
Given that Ireland enjoyed almost miraculously high growth rates from 1994 to 2007, it is easy for a people who became so used to success, to see the financial crisis of 2008 as not much more than a temporary interruption of the earlier growth trajectory.
It is only when one analyses the figures in more depth that one sees that problem facing Ireland is quite different from that facing other countries, and that the path to recovery may have to be much longer.
The deeper problems are well analysed by a Professor of Economics from my old university, UCD, in a paper entitled “The Irish Credit Bubble” published a few days ago. See www.ucd.ie/t4cms/wp09.32.pdf
Professor Morgan Kelly identifies two features that distinguish the Irish problem from that of most other countries.
One is the disproportionate reliance Ireland placed on the building industry to generate jobs, spending and tax revenue .
The other is the disproportionate increase in bank lending in Ireland since 2000.
House building provided just 4 to 6% of national income in the 1990s, but it provided 15% of Irish national income in 2007.
Bank lending amounted to only 60% of GNP in Ireland in 1997(slightly below the European average), but by 2007 bank lending had risen to 200% of national income (twice the European average). And to make matters worse, that lending was no longer based , as it was in 1997, on Irish deposits but predominantly on money borrowed on a short term basis on foreign money markets, some of it was in bonds that will mature for repayment in 2010.
Professor Kelly foresees a substantial further fall in Irish house prices. He argues that this will lead to people, who find that their mortgage then exceeds the reduced value of their home , walking away from their liabilities by emigrating as soon as they can find work abroad . He foresees write downs in the value of the mortgage book of some of the banks having to be so great as to eliminate even the extra capital the banks recently obtained from the Irish taxpayer . He argues that in 2008 the Irish Government should not have guaranteed all the debts of the bank, just the deposits. He believes that the taxpayers should not take this on the next time there is a problem.
Professor Kelly is one of the few economists who foresaw the crisis and his views deserve attention.
Many of the houses built during the credit boom were needed and will still be needed. Before the boom started , the Irish housing stock was insufficient for a population that was growing and which contained an increasing number of people living on their own . But some of the houses were built in the wrong places, in low density schemes far away from public transport and other amenities.
I argued in 1999 in a policy document of my party entitled “Plan for the Nation” that houses should have been concentrated in growth centres close to rail links. If that policy had been followed, the houses would have been more saleable and the write downs facing the mortgage holders and the banks today would be less.
Looking to the future, it appears that Ireland is saddled with a banking problem that will drag it down and hold it back for years to come, long after other countries have resumed growth. The Irish banks will not be able to give credit even to good Irish businesses with good prospects. But Ireland has many of the ingredients for a dynamic economy- a relatively young, educated and internationally minded population , good natural resources, and a political system which is capable of making relatively speedy decisions( which some bigger countries lack).
Banks in other European countries are in a better state than the Irish banks, and it should be possible to encourage them to lend directly to viable Irish businesses and households. This would need arrangements for easier cross border debt collection and standard terms for bankruptcy and priority between creditors. This should be a test for the European Union, to find a way to encourage cross border banking as part of a programme for economic recovery.
Ireland itself desperately needs to bring its personal bankruptcy laws up to date, so that people get a chance to start again rather than remain in bondage for up to 12 years as is now the case.