Death of the Celtic Tiger

Ireland is no stranger to hard times. From the potato famine to the “troubles” between the English and the nationalists, it seems the economy was too often just an afterthought. But for two magical decades, Ireland set aside these distractions and from this period of calm, grew a true economic powerhouse – the Celtic Tiger – rivalling the rest of Europe in terms of economic growth and individual wealth.

The great turnaround for Ireland came when successive governments moved towards a policy encouraging foreign investment and development. Taxes were cut and import duties were minimized making Ireland one of Europe’s most open economies. This approach worked wonders and seemingly overnight, factories were being built and massive housing projects were started. Property values skyrocketed and newly-rich developers scrambled to bring the next grand project online.

Naturally, much of the money to take on these elaborate enterprises was borrowed but no one – and especially not the banks providing the funds – worried about the viability of the projects. After all, property values were appreciating at a double-digit rate and if anyone was thinking “asset bubble”, no one was saying anything.

Alas, simply ignoring something does not make it go away. When the first signs of the sub prime credit crunch bubbled to the surface in the fall of 2007, Ireland was one of the first casualties. As the lack of credit within the markets became a global crisis, Ireland’s banks tightened the purse strings. The lack of affordable mortgages and development loans combined for a double whammy on the Irish economy. Property values which had doubled in just ten years collapsed, and massive development projects were scaled-back or abandoned altogether. The trickle-down effect soon pushed unemployment to levels not seen in Ireland in twenty years.

The fallout has been spectacular. In just the last year alone, property values have fallen by 50 percent and unemployment is approaching 10 percent nationally – in some pockets of the country particularly hard-hit, unemployment is well over 50 percent. Ireland’s banks – which lent money at a record pace for several years – required a $7.5 billion emergency bailout recently to remain solvent. The government was also forced to take a majority stake in several of the larger banks when the government promised to guarantee deposits held in individual accounts.

With a devastated banking system and an economy shrinking faster than most of its neighbors, Ireland is expected to suffer a deeper and longer-lasting recession than the rest of Europe. It may well be that this Tiger will not be roaring for some time to come.