Ireland: the bust after the boom

In Ireland, the papers are very much focused on how to deal with the bust after the boom. In the wake of the big fat no on the Lisbon Treaty and after 15 long years of upswing, it is readily apparent to anyone that the bust is happening. The question everyone is asking is how will Ireland survive this downturn. In three articles today, the Irish Independent gives us a good sense of the angst.

First, there is the scathing attack on government. The article, “If we blew the boom, let’s see how we handle bust” recalls the story I wrote about yesterday on Ireland claiming government have been irresponsible in squandering the money of the good years and were caught out by the bust. This time the article wonders where the Irish economy is headed, accompanied by a suggestive picture from Oliver Twist.

Interests groups will be lining up soon, like Oliver in Oliver Twist, pleading ‘Please sir, can we have more’ but Finance Minister Brian Lenihan will find the cupboard getting barer by the day

“We Blew the boom” proclaimed the headline in this newspaper on Tuesday. The economic case against the Government seems to be gathering pace and they can expect little sympathy from the electorate.

After spending years claiming undue credit every time the sun rose in the sky, the flipside now is that the politicians will get blasted for events that they can do little to control.

In much the same way as we seem to have “No Plan B” to deal with the rejection of Lisbon, the ruling administration has yet to produce a Plan B to protect the lifestyle and wealth that the people have become used to.

The bottom line is that we have become a bit spoilt and while Brian Cowen might be itching to point this out, I would advise against it.

He is still fresh in the chair and what must be done now is to make a bold statement on what type of economy will carry us through the next 20 years.

The 1990s were characterised by massive tax breaks on property which are now about as out of touch as an avocado bathroom suite.

Favour

The VCs did well out of the boom, the Government should call in a favour by getting them on board to identify the emerging hot areas of the IT and Biotech industry.

And no, I’m not calling for yet another quango. Their services should be given free reign. Tax breaks should then be given to those who invest in companies operating in these areas.

These are capital intensive businesses and flinging a couple of hundred grand in grant support is about as useful as the Kerry hurling team.

The premium is now on vision.
– Daire O’Brien

I don’t see things in quite as dire a way. Ireland still has a low tax, dynamic free market economy with unemployment much lower than the likes of France, Germany , Spain and Italy. The bust will change none of that. Sure, there will be pain, but the core advantages of the economy remain in tact.

In Public services face crunch time, the second of the three articles, Brendan Keenan puts the spotlight on public services and its massive growth during the boom.

“The size and cost of the Irish public service have risen rapidly in the past 12 years. But the economy has grown even faster, so the relative cost of the public service — as a proportion of national income — has not increased.

Now, growth in national income (GNP) has stalled. It is not expected to return to the levels of recent years even when the economy recovers. The problem is whether the growth in public spending can also be cut, in line with economic growth, while still delivering better public service.

Again, the article is quite downbeat about the Irish economy and where the money is going to come from for better public services. Keenan suggest government have no clue how to provide the improvements needed in healthcare, education and transport with a collapsing economy. One can feel the anger in his words.

The last article gets to the heart of matters, the housing bust. Price of average home has dropped by €30,000 in year is a title that says it all.

The property market is falling faster, and more than half of mortgage brokers expect the home loans market to weaken further in the next few months.

On a day when the bad news for the property market piled up, the head of the European Central Bank also indicated yesterday that interest rates were likely to rise next Thursday.

New figures out yesterday showed that the price of a house nationally was now down by almost €30,000, after prices fell by 9.5pc in the past year.

And the fall in house prices accelerated in May, according to the Permanent TSB/ESRI house price index.

This is the core of the problem in Ireland. The housing bust. Prices are falling and will continue to fall for some time. Ireland has seen the fastest housing growth in the developed economy over the past 10 years. Their housing sector will fall more than others.

And with the fall in house prices in Ireland, the pride in its ‘Tiger Economy’ has turned to anger as jobs are lost and Ireland slips into recession. This anger is a large part of the ‘no’ vote on the Lisbon Treaty. It also stems from the fact that people were under the illusion that the good times were going to last forever. And now that its gone a bit pear shaped, people are in disbelief.

In the end, all of this will pass. Ireland will go through its own lost decade much as Japan and Germany did after their own property bubbles in the 1980s and 1990s. However, the underlying dynamism of the Irish economy will help to pull Ireland out of its funk sooner than either Japan or Germany with their statist-lite economic paradigms.

What would be a cause for concern is if Ireland began to intervene in the unwind process, propping up zombie companies and bailing out the financial sector. The U.S. seems on this road as we speak. Hopefully, Ireland will not follow its example. If the calls for government to do something, anything, lead to a statist model of dealing with the bust, expect a very long and difficult decade.

Related articles
Public sector pay leaves Cowen between a rock and a hard place, The Irish Independent, 26 Jun 2008