PE readers may remember that Bruce Campbell, Executive Director of the Canadian Centre for Policy Alternatives, spoke last year at the FEPS/TASC Autumn Conference. An edited version of this article, with input from another Autumn Conference speaker, Lawrence Mishel (President of the Washington-based Economic Policy Institute) has just appeared in The Huffington Post.
The Irish people go to the polls on February 25. The governing Fianna Fail party — that created the fallen Celtic Tiger economic model and is now the object of widespread public outrage — will almost certainly be banished to political wilderness, much like the conservative regime casualties of economic crisis in Greece and Iceland.
The Celtic Tiger went from boom to bust with breathtaking speed. In the wake of (in part because of) four austerity budgets—seen as the toughest in Europe-- Ireland is locked in depression with ten successive quarters of economic contraction.
Over the last three years Ireland has seen its national income plummet by over 17%–the deepest and most rapid collapse of any Western country since the Great Depression. Official unemployment climbed 10 points to 14%, and by some measures now exceeds 20%.
Canada’s Finance Minister Jim Flaherty made several trips to Ireland in recent years: pitching Canada-Ireland trade, flaunting his economic management credentials, and it would seem, promoting opportunities in Canada for Irish youth who have been leaving in growing numbers. When I was in Dublin last October, I happened upon a huge banner spanning an imposing building in one of Dublin’s main squares, advertising working holiday opportunities in Canada for Irish students (which I found odd in light of the fact the Canadian youth unemployment rate was hovering around14%.)
On a visit to Dublin in late August 2010, Flaherty—rightly proud of his Irish heritage praised the Irish government on Irish public radio for its draconian public sector budget cuts. “Ireland,” he enthused, “certainly has led the European Union in taking the necessary courageous decisions toward fiscal consolidation”
This was at odds with his government’s own policy of fiscal stimulus. Could it be that Flaherty, the self-professed friend of average working families, was unaware of the catastrophic impact of the savage cuts were having on the Irish population?
Flaherty also praised the Irish government’s decision to guarantee all the debts of its insolvent banks, and criticized the credit rating agencies for not responding positively to what he termed “a solid plan.” What was he thinking? Praising a bank bailout that absolved (mainly foreign) creditors from any liability for their reckless lending; a plan that ballooned the government’s deficit from 12% to 32% of GDP, and public debt to a crushing 130% of GDP.
Until its collapse, the Irish model was widely seen as the poster child of successful development in a globalized era. The darling of conservative policymakers and think tanks, the Heritage Foundation declared Ireland the third most “economically free” country in the world after Hong Kong and Singapore in 2008. George Osborne, now Britain's finance minister, praised Ireland in 2006 as “a shining example of the art of the possible in long-term economic policy making.
It also drew praise from policymakers in Canada, including then Finance Minister Paul Martin. Industry Canada commissioned Québec economist, Pierre Fortin, to do a study of the Irish model and how it could be adapted for Canada. The C.D. Howe Institute praised its positive effects on corporate tax revenue. And of course, its low tax, business friendly, “light touch” regulation aspects greatly appealed to the ideologically conservative Jim Flaherty.
For both men, it provided inspiration for their own corporate tax cut initiatives—Martin lowering the corporate rate (plus surtax) from 28% to 22%, and Flaherty continuing the downward slope from 22% to 15% by next year.
A key pillar of the Irish model was an ultra-low 12.5% corporate tax rate (reduced from more than 40% in the late 1980s) and other tax subsidies to entice high tech multinational corporations to set up bases in Ireland from which to export into the vast European market of which it was now part.
This is not unlike Flaherty’s plan to entice foreign corporations to establish export platforms targeting the US market, a strategy that continues to be hampered by the post-9/11 “thickening” of the Canada-US border. Despite adopting numerous to US security related practices, Canadian efforts to reverse border restrictions have had limited success. The latest of these attempts, the so-called North American Security Perimeter, currently under negotiation, is likely to meet the same fate as earlier efforts, short of a major surrender of Canadian control over, for example, immigration, refugee and information privacy policies.
The Irish model produced a stunning record of economic growth that dramatically reduced unemployment and reversed the historic outflow of Irish labour, and on paper, converted Ireland from Europe’s poor cousin to one of Europe’s richest members.
Foreign direct investment—led by the computer and pharmaceutical sectors--poured in. It became the preferred location of (mainly US) multinational corporations seeking to keep their profits out of reach of their home country tax authorities. (Google, for example, is reported to have saved $3.1 billion over the last three years by setting up shop in Ireland). Ireland became the largest jurisdiction outside the US for declared pretax profits by American firms. The transfer of profits out of Ireland accounts for 20% of Irish GDP.
While indigenous Irish industry expanded, it never lived up to expectations. The hallmark characteristics of an enclave economy--weak linkages to the domestic economy, benefits accruing to a narrow segment of society--were clearly in evidence. Industry remained dominated by a relatively small group of multinationals. Data from the Irish Development Agency, show that while the foreign and domestic sectors each employed about 150,000. The foreign-owned sector accounted for over 80% total output.
While it created a lot of employment—much of it in the form of low wage service jobs—the Irish boom accentuated income and wealth inequality. Rather than apportioning gains to strengthen the welfare state to be more in line with European norms, the Irish model gave precedence to the interests of foreign capital and to a small domestic elite that had successfully ridden the Irish prosperity wave.
The most recent phase of the Irish “miracle” was built on a tsunami-like surge of reckless lending by a loosely regulated banking sector to property developers and homebuyers. They drew on unlimited funds borrowed from willing European and U.S. banks at interest rates cut in half by its membership in the European Monetary Union, and spurred on by government subsidies.
A cozy cabal of politicians, bankers and property developers produced an orgy of speculation, which drove a monstrously unsustainable construction boom and real estate bubble.
At the height of the boom in 2006, construction accounted for 20% of GDP and a fifth of the workforce. Bank lending for construction and real estate rose 1730% from 1999 to 2007. House prices doubled from 2000 to 2006 as household debt soared to 80% of disposable income. Between 2003 in 2008, net foreign borrowing increased from 10% to 60% of GDP. Bank lending standards rivaled the US subprime mortgage fiasco.
Income and capital gains tax cuts left the government coffers with a narrower tax base much more vulnerable to collapse of the construction and real estate sectors.
When the global crisis hit, the bubble burst: foreign finance dried up, exports tanked, construction came to a halt and property values plunged, exposing the toxic debt at the heart of the Irish banks. Ireland’s budget surplus and low public debt turned bad with lightening speed.
It became increasingly clear during the fall of 2010, that the Irish state had sealed its own financial fate by bailing out its banks and now was at the mercy of the European Central bank. In late November, the government basically handed control over to the ECB and International Monetary Fund concluding a massive $110 billion “rescue” package, likened by some to the post-World War I German reparations accord.
The conditions of the loan were punishing: massive public spending cuts and tax increases whose impact would fall disproportionately on low income and vulnerable groups. Ireland’s National Pension Reserve Fund was thrown into the Agreement thereby greatly limiting its ability to make the strategic investments necessary for recovery. It clearly was not a rescue of the Irish taxpayers who were saddled with the entire cost of adjustment.
Those actually rescued by IMF-EU deal were foreign bondholders (mainly European and US banks) who suffered no loss whatsoever. Not a single cent of Irish private bank debt taken over by the government was written down, and the punitive 5.8% interest rates imposed meant that Ireland will be transferring 7% of its national income to foreign bondholders for years to come. Nor did the ECB admit its own culpability or pay any price for failing to rein European banks’ lending spree to the Irish banks.
The Irish think tank TASC reflected the view of many in its assessment of the EU-IMF agreement: “The deal is inequitable, won't work and will either lead to a sovereign default or will condemn the Irish people to a prolonged period of economic stagnation.”
In early December, the government implemented the IMF-EU directive with its fourth and most extreme austerity budget since the crisis began. Three quarters of the spending cuts were to social transfers and public services. They included a 4% cut to social welfare payments and a 12% cut in the minimum wage. The budget’s regressive tax increases fell hardest on middle and low-income workers. Significantly, under pressure from US multinationals and to the dismay of EU countries, the 12.5% corporate income tax rate was spared.
The budget’s cumulative (mainly) spending cuts and tax hikes are equivalent to an astonishing 18% of GDP; or put in a Canadian context, would amount to a $300 billion adjustment. Government officials are predicting this will be offset by rapid export growth. However, with its main markets—Europe and the US—in the doldrums, and no longer able to devalue its currency, this seems like wishful thinking.
The government’s bleeding-the-patient budgetary plan is doomed to failure. It will not produce recovery, create jobs, or restore public finances. And it will increase already high levels of inequality and poverty. As it stands, it condemns the country to years of economic stagnation and untold hardship. A blight on future generations, it accelerates the exodus of youth in search of jobs abroad.
The bank bailout and the ECB-IMF agreement are major issues in the election campaign. The new government will likely push for renegotiation of the Agreement, including a partial debt default or restructuring, perhaps legitimized by a referendum as occurred in Iceland. Failure by the European Central Bank respond to these demands, will raise calls for Ireland to exit the Eurozone, an option seen by many as the “nuclear option:” a cure worse than the disease.
Clearly the Irish model was deeply flawed. Its dynamism was highly dependent on foreign capital and strong export demand. Linkages from the foreign sector to indigenous industry were limited. The rapid accumulation of wealth during the boom years either flowed out of the country or, to the extent that it remained, benefited a small minority. Resources were not used to strengthen public services and distribute income widely. Cuts to personal income and capital gains taxes left the government coffers with a narrower tax base highly dependent property taxes, and hence on continued expansion of the construction and real estate sectors. And in the end, the boom surfed on a construction-real estate bubble in a sea of rotten debt.
All of these features made the Irish model highly vulnerable to collapse as events have shown. At its root was a free market economic orthodoxy that, despite being discredited by the global economic crisis and the failure of many of its star pupils around the world, is unfortunately far from dead.
Long term, the path out of the crisis will involve reconfiguring its development model in a way that more closely resembles the solidaristic Northern European model: greater emphasis on broad based internally generated income and wealth, and its wider distribution in a way that responds to the needs and aspirations of the Irish people.
In Canada, under the Conservative government, disturbing elements of the Irish model are in evidence: a dramatically smaller tax base available for social programs and public services, themselves further crowded out by increased military/security expenditures; a narrower tax base increasingly dependent on commodity (mainly oil) revenues which are vulnerable to major fluctuations in the external environment; a sluggish economy whose main private sector engine over the last two years has been a housing mini-boom that has pushed household debt to unprecedented levels; and historically high and growing levels of income and wealth inequality.
The result of moving down this path is more likely to be a slow motion economic decline than a spectacular flare out as occurred in Ireland. Regardless, continuing to extol the virtues of the now extinct Celtic Tiger will require more than a touch of blarney from our Finance Minister.
Thanks to Sinéad Pentony, head of policy at TASC, for her valuable comments and for making sure I didn’t say anything outrageous. TASC is CCPA’s sister think tank in Ireland.
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