Status of the Irish Economy

6 Dec

As part of the Eurozone, Ireland is a member of the European Monetary Union. This means that Ireland shares a common currency (the Euro) with sixteen other nations that are part of this union. When Ireland entered into this monetary union, they gave up government control of their fiscal policy. While the monetary union made doing business with countries in Europe easier, it forced them to give up any kind of economic flexibility they had when they controlled their own currency. This issue came to a head in 2008 with the Irish Banking Crisis. The crisis was caused by an easy-money real estate bubble, in which banks provided cheap credit to almost anyone who wanted to buy, or build houses. This led to a spike in property prices that masked the underlying unsustainability of the Irish bank’s irresponsible lending. When the global recession hit in 2008, home prices collapsed. As more and more people were unable to pay back their loans, the solvency of Irish banks was called into question. With insolvency looming, the Irish government guaranteed the debts of six major Irish banks in order to maintain the confidence of Irish citizens. When the scale of the situation became apparent Ireland was forced to formally request financial support from the European Union’s European Financial Stability Facility and the International Monetary Fund. As part of the bailout program, the European Union and the European Central Bank had a large amount of influence on the economic policy of the Irish government. Since Ireland was only part of a monetary union and not a fiscal union, the Irish taxpayer was forced to take on all of the government debt while the European taxpayer paid nothing. Since the Irish Government has no control of fiscal policy, they have no way of devaluing their currency in order to lighten the debt load. Because European lenders did not want to see the currency devalued, the only option left was a set of harsh austerity measures. The EU and ECB made sure that the Irish government cut spending in an effort to balance the budget. Three years since the bailout and there is question as to whether the austerity measures are aiding in the road to recovery for the Irish people or just condemning them to a prolonged period of economic stagnation.

 

Ireland is in a bind when it comes to their economic situation and their membership in the Eurozone. Ireland could recover faster if they left the Eurozone and regained fiscal control of their currency, but they can’t for two main reasons. The Eurozone has given Ireland a strong backing and a good reputation internationally. Since the Irish economy is based so heavily on exports, the success of the economy hinges on this international reputation. Secondly, if Ireland left the Eurozone and again adopted the Irish pound, their debts would double as the value of the Irish pound fell through the floor. So Ireland is left in a precarious situation. While the adoption of the Euro has helped Ireland grow into a competitor in the world market, it has also forced the country into a period of economic stagnation as a result of harsh austerity measures. Ireland meets with the troika this month to negotiate an exit strategy from the bailout program. Historically, the IMF has called on Europe to shoulder more of Ireland’s debt burden. Since Europe needs the Irish bailout program exit to be a success, Ireland might be in a position to exploit a division in the troika in order to make the case for a retrospective direct recapitalization of the two Irish banks AIB and Bank of Ireland. Whatever the approach, Ireland needs to negotiate an exit strategy that will put Ireland’s interests above Europe’s. 

 

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