Future historians will surely see Ireland’s joining the Eurozone in 1999 and abolishing its national currency to adopt the euro as the worst policy mistake ever made by the Irish State. It was an act of gross irresponsibility on the part of a political class that had come to see themselves as “good Europeans” first and upholders of the national interests of its own people second. Explaining how this mindset came about will be a challenge to the country’s historians and social psychologists.
The Republic of Ireland joined the Eurozone on its establishment even though it did nearly two-thirds of its trade – exports and imports together – outside the area. It did some one-third of its trade with the Eurozone, one-third with the UK and one-third with America and the rest of the world. (The proportions for 2008 were : Total trade – Eurozone 34%, UK 24%, Rest of world 42%; Exports – Eurozone 39%, UK19%, Rest of world 42%; Imports – Eurozone 25%, UK 33%, Rest of world 42%, in the Statistical Yearbook of Ireland 2009). Its Europhile politicians assumed at the time that Britain would adopt the Euro before long, which would put the bulk of Irish trade inside rather than outside the Eurozone. But of course Britain did not and will not.
Moreover when Ireland joined the Eurozone it had been experiencing for over half a decade its “Celtic Tiger” economic boom. The period 1993 to 1999 was the only period in the history of the Irish State, which was established in 1921, that it followed an independent exchange rate policy and let the Irish pound float, thereby giving priority to its real economy of production and employment. This gave it a highly competitive exchange rate, which encouraged massive inward foreign investment, boosted exports and underpinned average annual growth rates in those years of 9% of GDP.
In the early 2000s, the first years of Eurozone membership, the euro itself fell against the dollar and pound sterling, which added to Ireland’s competitiveness in external trade. Unfortunately the growth rate then slowed, as output expansion shifted from exports to the domestic sector in response to the Eurozone’s unsuitably low interest regime and the housing and property boom of the early 2000s.
Eurozone interest rates were low in those years to suit Germany and France, whose economies were in recession. Ireland more than halved interest rates on joining EMU, even though it needed higher rates to cap its boom. This gave huge impetus to the borrowing binge that followed between 2001 and 2007. This was concentrated on the market and expanding domestic demand. It made the Republic of Ireland’s property bubble one of the biggest in the world.
Having surrendered control of monetary policy on joining EMU, the Irish Government let fiscal policy rip. It cut taxes and raised spending, buoyed by revenue from the booming property market. This began the process which landed the State with annual public sector deficits of over 10% of GDP and set the scene for the disastrous bank policy it adopted post-2008.
Ireland’s blank bank guarantee
When the property bubble burst some Irish banks were insolvent because of bad property loans and all had serious bad debts. In September 2008 Irish Taoiseach Brian Cowen and Finance Minister Brian Lenihan gave their infamous blanket guarantee to the Irish banks, from which the intolerable debt burden, the credit crunch, and the current crucifixion of the Irish economy all stem.
It would have been reasonable enough for the Irish Government to guarantee peoples’ deposits in the banks, the savings of citizens, and so head off a bankrun. Its folly was to give a simultaneous State guarantee to the creditors and bondholders of the Irish banks, and in particular the notorious Anglo-Irish Bank, a property developers’ bank which was in no way “systemic” to the country’s finances.
Unlike depositors, who can withdraw their money, creditors/bondholders cannot run anywhere. These were mostly foreign banks from which the Irish banks had borrowed vast sums over the years for on-lending to Ireland’s property market and which had made good profits on those loans.
At the time of the blanket bank guarantee Jean- Claude Trichet, Governor of the European Central Bank (ECB), phoned Finance Minister Lenihan from Frankfurt and told him that on no account should he let any Irish bank fail. If the insolvent Anglo-Irish Bank had been let go, the German, British and French banks which had lent that one bank alone some €30 billion for on-lending to the Irish property market, would have been badly hit. There could have been a chain reaction of bank failures across the Eurozone.
The European banks, and some American ones, had been happy to make money stoking the asset bubbles of the PIGS countries – Portugal, Ireland. Greece and Spain – under EMU and now feared these countries’ banks defaulting. Banks in Germany, France and Britain together had over €300 billion of exposure to the Irish banks and property market. In proportion to population size this was nearly ten times their exposure to Spain.
So with property prices plummeting and the investments of these foreign banks threatening to go belly-up, the Irish Government promised that the Irish State and Irish taxpayers would ensure that foreign creditors got their money back in full. There would be no default on senior bondholders of the country’s banks even if it meant years of pain for the Irish people, a credit crunch for local business, deflation, austerity, high unemployment and a return to mass emigration for the country’s youth.
The Irish Government gave this blanket bank guarantee on the assumption that its banks would have the backing henceforth of M.Trichet and the ECB. They got that for the next two years. During this time the ECB lent money at 1% interest to the Irish banks. Then in September 2010 the ECB grew alarmed at the size of the sums being demanded of it and the poor quality of the collateral the banks were offering against those loans.
Bailout/stitch-up by the EU
That month the two-year blanket bank guarantee was up, but the Irish Government, in line with ECB policy, renewed it. Although the Government had enough money to finance its own bills until mid-2011, it could not simultaneously guarantee the debts of Anglo-Irish and its other insolvent or near insolvent banks. With naïve trust in its Eurozone “partners”, the Government stood by its guarantee that no German, French or British bank would suffer. It would see to it that Ireland’s taxpayers would continue to pay off the debts of its insolvent local banks.
Two months later, in November, the EU pulled the ground from under the Irish Government. The European Central Bank told it that it would no longer lend Ireland money at 1% interest, but would organize a loan instead from its “shock-and-awe” fund which had been set up in May to lend to Greece, the European Financial Stabilisation Facility, at 5.8%. The Irish Government bowed to the harsh terms of the €67 billion loan being pushed on it by the ECB and the EU Commission, with the IMF in tow. US Treasury Secretary Geithner vetoed an IMF suggestion that senior bondholders in Ireland’s banks bear some of the costs. They would be paid in full. A troika of the ECB, the EU Commission and the IMF took over detailed management of Ireland’s finances and began supervising the release of the various tranches of the loan.
It was a humiliating culmination to the Irish political elite’s long love-affair with Brussels. As an editorial put it in the Irish Times, the paper which for decades had been the most uncritical advocate of each step of further EU integration by the Irish State: The EU/IMF loan and the conditions attached to it “represents nonetheless a defeat for this State which has turned us, in the blink of an eye, from European success story to a people at the mercy of the benevolence of others. It was notable that the announcement was made in Brussels and only after that was the Government able to hold its press conference in Dublin.” (29 Nov 2010)
In this way Ireland has been turned into a vast debt-service machine by the criminal incompetence of its own chief policy-makers and the demands of the European Central Bank. It has become a “bankocracy”, ruled by bankers. In December the Financial Times nominated Ireland’s Brian Lenihan, for the second year in succession, as the worst Finance Minister in Europe. In February this year the Fianna Fail Party, which had held office during the Republic’s boom and bust and which had dominated Irish politics since the 1930s, got its deserved come-uppance. It fell from 77 out of the 166 seats in the Irish Parliament to 20.
It was replaced by a Fine Gael-Labour coalition government, with 113 seats between them, which however has to date continued the same policy as its predecessor and is dutifully implementing the provisions of the Memorandum of Understanding with the ECB, the EU Commission and the IMF Troika.
This Irish debacle should make small countries that are outside the Eurozone thank heaven they are not in it.