Ireland’s Recovery Has Nothing to Do With Austerity

After years of crisis, austerity, and wage cuts, Ireland’s economy grew by 7 percent last year, faster than China’s. With a general election on Feb. 26, the governing coalition has been quick to claim credit for this turnaround, as have policymakers in Berlin and Brussels who celebrate Ireland as the poster child of the harsh medicine they prescribed in the country’s financial assistance program. “See,” they say to Greeks and others, “if you do what you’re told, it works.” But while Ireland’s economic recovery is impressive, it has happened despite the European Union and International Monetary Fund’s policies that the government faithfully followed, not because of them.

Understanding Ireland’s present requires first understanding its recent past. Twenty-five years ago, Ireland was the poorest country in northern Europe. Yet by the eve of the financial crisis, it had leapt to being among the richest. Thanks to growth rates matching Asia’s dynamic economies, it was dubbed the “Celtic Tiger.” That remarkable economic progress was based on attracting foreign investment, notably from American firms, with its attractive business climate, including its low corporate taxes and skilled workforce. That foreign investment, in turn, fueled an export boom. But the years before the crisis also saw the emergence of a huge property bubble, financed by reckless bank lending, which ended in an almighty bust after 2007.

Given the size of the bubble, the bust was bound to be painful. But government policy made matters much worse. In late September 2008, in the turmoil following the collapse of Lehman Brothers, the previous Fianna Fail administration extended a two-year government guarantee to all the creditors of Ireland’s busted banks. In effect, this put taxpayers on the hook for the banks’ astronomical losses. By late 2010, when the government finally saw sense and sought not to extend the guarantee, it was strong-armed into bailing out banks’ creditors anyway by eurozone policymakers. In an outrageous abuse of power, the then president of the European Central Bank, Jean-Claude Trichet, threatened, in effect, to force Ireland out of the eurozone should it not comply.

The upshot was that Irish taxpayers were lumbered with some 64 billion euros in bank debt — around 14,000 euros ($15,400) per person. They were forced to bail out the German, French, and British banks and other foreign bondholders who had financed Ireland’s bubble. And Ireland was pushed into the clutches of the EU and the IMF. Over the next three years, they imposed huge budget and wage cuts as a condition for lending the Irish government 67.5 billion euros, primarily to bail out the foreign creditors of bust Irish banks.

The current Fine Gael-Labour Party coalition, which took office in March 2011, cannot be blamed for that. But it can be criticized for failing to fight in Ireland’s corner in Brussels, naively relying instead, to no avail, on other eurozone governments’ goodwill to deliver justice on the bank debt. Moreover, the present government cannot claim credit for the recovery. This was primarily due to a combination of Ireland’s underlying strengths and more favorable external factors, rather than the EU-prescribed policies that it has followed.

For sure, the government needed to tighten its belt once the tax revenues from the property bubble had vanished. But the pace and scale of austerity were unduly harsh, not least because of the bank bailouts. Moreover, the government’s Germanic drive to bolster exports by driving down wages was misconceived. Lower wages made Ireland’s huge debts, both private and public, harder to bear. They depressed domestic demand further, pushing up unemployment. And slashing wages was based on a false premise. While Irish civil servants enjoyed bumper pay raises in the bubble era, wages in the export sector never got out of line with productivity. And since Ireland competes on the basis of its increasingly high-tech business clusters, not its low wages, wage cuts were not a sensible road to growth.

Why, then, has the Celtic Tiger rebounded? In part, because the economies of Ireland’s two biggest export markets, Britain and the United States, have recovered, so export-led growth has resumed. A weaker euro has also helped. Above all, as research by Aidan Regan of University College Dublin shows, many of the export sectors in which the dynamic Irish economy increasingly specializes — notably biotech, pharmaceuticals, and business and computer services — have boomed. And they boosted output and employment while raising wages, not slashing them.

A note of caution is due. Part of the recovery is an accounting fiction due to U.S. tech and other firms allocating profits to Ireland for tax purposes; the only benefit Ireland derives from this profit shifting is the low taxes charged on it. Nor is the economy out of the woods yet. While unemployment has fallen sharply, it is still 8.9 percent, and many talented young people have emigrated. Overall wages remain depressed. The government still ran a budget deficit of some 1.7 percent of GDP last year. And the Irish economy is acutely vulnerable to a slowdown in the United States or a bursting of what some think is a tech bubble.

Still, it remains nonsense that the EU policies that the Fine Gael-Labour Party government faithfully followed triggered recovery. Nor is it true that economies with very different structures and an unbearable burden of government debt, such as Greece, could emulate Ireland’s success if only they followed instructions.

Ireland now needs a clean broom. Fianna Fail and Fine Gael have alternated in governing the country since just after its independence nearly a century ago. Their differences derive from their stances in the post-independence civil war, rather than from ideology. Since neither has proved competent, alternatives are needed.

Regrettably, the search for alternatives has often led down blind alleys in other European countries. Greece’s radical-left government has so far failed to obtain debt relief from its EU creditors and is not confronting the oligarchs and special interests that also hold the economy back. The racism and protectionism of the likes of Marine Le Pen’s National Front in France would be a disaster.

But disenchanted Irish voters are rallying to mostly reasonable independents and new parties that reflect a variety of views from conservative to social democratic. Together, the upstarts are polling 29 percent, ahead of both Fine Gael and Fianna Fail. Irish people can confidently reject the old establishment parties that have mismanaged the country in recent years and embrace positive change.

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