Ireland, until not long ago known as the "Celtic tiger", has almost overnight become a wailing cat in need of charity. The bankruptcy of the Irish economy is a warning sign for anyone who believes that "it couldn't happen here," and it's worth drawing some lessons from Ireland's experience.
In the film "The Matrix", the hero Neo (Keanu Reeves) has to choose between taking a blue pill and a red pill. The blue pill will enable him to live amid peace and pleasure in a dream world for ever, while the red pill will give him life in the painful, tough, real world, but will allow him to enjoy independence and freedom. Neo chooses the red pill. He chooses reality, difficulty, and freedom, in contrast to Ireland, which chose the dream. Ireland decided to ignore reality, and for two years after the global credit crisis, carried on business as usual.
Between 1995 and 2000, the Irish economy grew at a dizzying rate 6-11% annually. After a slowdown in 2000-2001, it went back to 5% annual growth, until mid-2007.
As a result, from being the poorest country in Western Europe, Ireland became the richest, with per capita GDP 40% higher than Israel's. This achievement earned it the sobriquet "Celtic tiger", and Ireland adopted the label, ignoring the encircling dangers.
Ireland's mistakes:
1. Real estate
For 5-6 years, Ireland ignored real estate prices. The local real estate bubble began to swell. Despite experts' warnings, credit continued to flow, and prices rose. Warnings that prices would collapse by 80% failed to make any impact. The country's leaders looked the other way.
2. Size
A small country is a risky business. It usually has little breathing room. Incorrect management, a small mistake, election economics such things are liable to lead to a crash. For example, the leading Irish bank, Anglo-Irish, behaved with near-criminal negligence in its credit policy, and the authorities turned a blind eye.
As a result, the government had to nationalize the bank in 2009 and cover huge losses. According to the World Bank, the state was forced to absorb bank losses from the real estate bubble amounting to 30% of Ireland's GDP. These losses swelled the fiscal deficit, causing a crisis.
The regulator slept on watch, leading to certain ruin. It's strange to see how a country with a population amounting to just 1% of that of Europe can endanger the stability of the euro and of the whole region.
3. Democracy
Democracy, it turns out, can be the root of all evil. Luxembourgish prime minister Jean-Claude Juncker once remarked, "We politicians all know what has to be done, but we don't know how to be re-elected after we have done it." Ireland is due to hold elections at the beginning of 2011.
It looks as though the Irish people will throw out the ruling party, just as the American people turned their backs on the Democrats on November 2. The imminent elections have so far prevented the government of Ireland and its finance minister from introducing painful, unpopular measures.
The Irish have enjoyed a huge party for years, and it's only natural that they should want to continue celebrating. A politician who declares, "The party's over, now everyone has to clean up," is probably on a hiding to nothing.
Few politicians are capable of taking painful steps that will lead to defeat at the polls but that will heal the economy in the long term.
4. From partner to enemy
Never turn a strategic partner into an enemy. Ireland built a rich economy thanks to its membership in the European common market, and with the support of Germany. Because it received a great deal of money from Europe (mainly financed by Germany), and because it attracted foreign capital by reducing corporate taxation to 10-12.5%, it managed to grow the way it did.
Giant companies like Intel, Dell, and HP invested in Ireland. However, the low tax rate angered other European countries, especially Germany, which saw this measure as unfair competition and as contravening the European constitution.
Germany is now leading the plan to save Ireland with massive loans.
Germany will set terms for the loans that will be very tough for the Irish, among them a rise in corporate taxation rates, which will endanger the future of capital inflows.
Israel is currently engaged in annoying what is practically its only strategic partner in the world, the US. Will this carry a heavy price in the future?
Professor Shlomo Maital is a senior research fellow at the Samuel Neaman Institute for Economic and Policy Studies (SNI) at the Technion in Haifa.
Published by Globes [online], Israel business news - www.globes-online.com - on November 22, 2010
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