Eclectic Rant: Demise of the Celtic Tiger

By Ralph E. Stone
Tuesday December 14, 2010 - 04:40:00 PM

I read with interest Conn Hallinan's interesting, informative article, Dispatches From the Edge: The Great Hunger Returns (Dec. 6, 2010). Last year, my wife and I visited the Republic of Ireland. While the Irish newspapers hinted at economic difficulties, tourists and probably most Irish citizens still saw Ireland as the Celtic Tiger. Perhaps it was mass Irish denial.  

While I am not an economic expert, I offer my brief layman's comment on Ireland's dire economic situation. 

On December 7, 2010, Irish lawmakers narrowly approved tax hikes as part of an $8 billion budget "slash-and-tax plan" imposed as a key condition of Ireland's international bailout. How did Ireland get into this economic mess? Because Irish banks engaged in reckless lending during an overinflated real estate bubble. Sound familiar?  

Remember, the Irish state is not broke, rather, the Irish banking system is broke. The question Irish citizens should have asked: Why did the Irish state, which is solvent, link itself to the bust banks? If the Irish state had let the banks go bust, then the European Central Bank (ECB) would be accountable for its culpability for allowing German, French, and English banks to lend recklessly to Irish banks.  

By assuming responsibility for the Irish banks' greedy, irresponsible lending practices, the Irish state has shifted from bank shareholders and bondholders to Irish taxpayers, who had nothing to do with the banks' ill-advised practices, the burden of paying off the bailout. In short, the banks that should bear the burden will be bailed out by Irish citizens. And to add salt to the wound, the banks' shareholders and bondholders will probably make interest on the deal. 

Irish citizens can expect to pay higher taxes, see pension cuts, a reduction in public-sector salaries, and a reduction in the minimum wage. Ireland's unemployment is now 14 percent and I would expect it to rise. As so often happens, when a country receives a bailout, the social safety nets begin to erode when the need is the greatest.  

At 12.5%, the corporate rate has been the cornerstone of Ireland's industrial growth for the period 1995 to 2007. Ireland became the "Celtic Tiger" during this period. This rate remains among the lowest business tax in the developed world and is regarded as the single biggest factor in getting multinationals to open shop in Ireland, attracting foreign investment, and stemming emigration. I expect a minor increase in corporate taxes, but not so much as to risk corporate and foreign investment flight.  

Why did the Irish state take on the burden of the Irish banks? Because they were too big to fail. Haven't we heard that argument before? 

Once the Irish face the full force of Ireland's debt burden, Prime Minister Brian Cowen and his coalition government may face disenchanted voters at the next election.