Read an Excerpt
Preface
When the last edition of this book was going to print in April 2011 the economy of Ireland was still reeling from a tumultuous three years of economic setback. Output had declined on a scale almost never seen in peacetime anywhere, unemployment had trebled, employment had declined by almost 300,000 and large-scale net emigration had resumed for the first time in almost 25 years.
The country had been hit by a property crash of unprecedented scale with house prices falling by over 50 per cent and some commercial property by much more. Huge private and public sector debt problems ensued and the banking system almost collapsed. Part of these problems could be linked without question to the international banking collapse and the subsequent large and sustained recession in the developed world. The fact that the institutional structures of the euro zone were ill equipped to cope with this financial crisis greatly exacerbated the problems.
But Ireland’s difficulties were at the acute end of the range and at times it seemed that the political system could not survive intact in the face of widespread anger and with huge numbers facing large-scale financial problems arising from negative equity, lost jobs and a fear that the euro zone might implode.
Three years on, things look a lot brighter. As some populist commentators fuelled the flames of discontent, most of the Irish population got on with dealing with a crisis that was largely of our own making. There is only so long one can lament events and attempt to blame others, be it at a personal or societal level, but ultimately we must move on, try to make good the damage and plan for a better future.
Many of those most affected in fact complained least; the newly unemployed, the people trapped in negative equity and the young who took the brunt of the pain. Very often it was those least affected who complained the most; those in secure, pensionable jobs and many of the elderly who were largely protected from the effects of the recession.
Another Remarkable TurnaroundThe year 2013 now appears to have seen a major turning point. The economy, after flatlining in 2011 and 2012, expanded in GNP terms (see Chapter 7 for a discussion of this) by over three per cent and employment increased by 60,000+. Predictions from independent sources suggest a further increase of 50,000+ jobs in 2014 with possibly a similar increase in 2015. If this turns out to be the case, then a remarkable recovery in employment will have taken place in just three years, again, as in 2007, with no agency predicting this major turning point. Property prices, in particular in Dublin, have risen again, in some cases quite significantly; not to the unsustainable levels of 2007, of course, but back to longterm norms. The loss in competitiveness that had taken place between 2002 and 2007 has been largely reversed. The euro crisis has abated, at least in terms of bond yields and the value of the euro. Few are betting on its break-up now, at least not in the foreseeable future.
As argued throughout this book, though, one should not be deflected from the medium- to long-term focus, by short-term gyrations of financial markets or predictions of imminent doom or boom. The world is a much more complex place. Things come in cycles; and how easily people forget the past, even the immediate past. That is the real danger that confronts Ireland in the years ahead.
Where Now? The Wider ContextThis book is not and never was concerned primarily with shorter-term economic issues. It generally takes a much longer-term historical perspective, a perspective that is salutary in reminding us that booms come to an end and, in the recent context, that the ‘bad times’ do not last for ever. Indeed, in some cases they can end much more rapidly than expected, as in the mid 1970s or early 2000s, or last much longer than is necessary, as was the case in the 1950s and 1980s (see Chapter 1). This book is also much more about general policy issues, thereby providing the context for debate, be it in the short, medium or long term.
There is no reason why Ireland cannot prosper in years to come and remain one of the high-income countries of the world (see Chapters 1, 6, 7 and 9). The country has a healthy, stable democracy and a well-established rule of law. Its people and its level of human capital are the same as they were prior to 2008 (see Chapter 13). There is an openness to competition and entrepreneurship that simply did not exist in the 1980s. Ireland has the security of membership of the euro zone and a strong commitment to the EU and thus to free trade, international competition, a cleaner environment, and all that the EU stands for on the world stage (see Chapter 3).
All democracies are flawed to some extent and economic debates are often fraught and misinformed, Ireland over the last four years being no exception. Predictions of economic decline or success can be altered within months. And it is also worth remembering that economic policy is exercised in the political marketplace. Economists may have forgotten their history up to recent times but they also often forget that economic policy and politics are inseparable. Having a good solution to an economic problem is of little benefit if the political system cannot be assured of delivering on it.
The euro crisis is proof positive of this: too often the political difficulties of responding to the crisis were overlooked by many economists. Very often the same people who were criticising policymakers for not responding firmly and quickly enough to the crisis were at the same time castigating them for lack of democratic accountability.
The equity issues of the crisis of the last six years, though, will be played out for some years to come (see Chapter 8). The most important antidote to inequity is to create employment; as mentioned, this is happening now in Ireland on a large scale. But there are still very high unemployment levels, almost three times those in the mid 2000s.
There is also a strong intergenerational inequity resulting from the crisis. It is the younger age groups who almost certainly bought houses at the top of the boom, with most of the older generation having long paid in full for their properties, purchased at times of much lower real prices. Besides, to pay for the debt the burden will again continue to fall mostly on the younger generation, through reduced incomes for those starting out at work, fewer promotional opportunities, particularly in the public sector, and longer working lives. A disturbing reflection of this is the exercise of ‘grey power’ in recent years, as a result of which payments to the over-65s, regardless of their circumstances, have been largely protected while those to other, younger groups have been cut (see Chapter 8).
There are potential disasters that should continue to concern us, such as the threat of a major terrorist attack, especially if it involved the use of biological or nuclear weapons, or indeed a war initiated by the aggression of a nation state. Events in Ukraine in recent months have been a stark reminder of this. The possibility of a major military confrontation in some part of the world, but particularly in Europe, would have quite catastrophic consequences for the economy of Europe upon which Ireland depends so heavily.
There is also the possibility of a major environmental disaster leading to the loss of hundreds of millions of lives and the danger of major water shortages for tens of millions of others: events in Japan in 2011 reminded the world starkly of this (see Chapter 10). There is also the possibility of severe energy shortages, either because the world runs short of the exploitable natural resources required or because of the actions of some states in cutting off supply. Again events in Ukraine have brought home a timely reminder of this threat. On all of these issues Irish interests and concerns are best voiced at an EU level and through the EU on the global ‘stage’ (see below).
As urgent and pressing as some of the economic decisions of the next few years are, they must be seen in this context. These global problems are outside the control of Irish policymakers acting on their own and yet could have catastrophic consequences for Ireland. The problems we face in the years ahead – resolution of the remaining problems of the banking sector, continued restoration of balance to the public finances and maintaining competitiveness – are all largely within our own remit and can be resolved, given the political will and an informed and realistic public debate. In relation to the former, the vociferous objections of special interest groups (and often those who suffered least in the recession) must be resisted, and in relation to the latter, alternatives must be presented, especially by those whose job it is to sift and present information/arguments in a balanced way, so that informed decisions can be made.
Longer-term Economic Policy FrameworkIreland is now a region of the euro zone, with the euro having replaced Irish notes and coins in January 2002. As such, there are no chapters in this book on monetary policy or on balance of payments and exchange rate policy in Ireland. The policy emphasis now at an Irish level, though, is almost exclusively on the competitiveness of the EU region, ‘Ireland Inc.’, and this is reflected in many chapters throughout the book (see in particular Chapters 2, 6, 7 and 9). Even in relation to this Ireland must operate within an agreed competition and regulatory environment determined, with Ireland as a voting member, at EU level (see Chapter 5). Competitiveness is a key determinant of our attractiveness to foreign direct investment: the scale of US investment has been such that Ireland might be viewed in an industrial sense as a region of the American economy (see Chapter 9), despite the fact that in a monetary sense the country is an integral part of the euro zone (see Chapter 3). International benchmarking in terms of competitiveness is now commonplace and the Annual Competitiveness Reports produced by the National Competitiveness Council each year since 1997 are some of the most talked-about reports published.
Despite the industrial connection with the USA and the economic, monetary and political links with the EU, the euro zone in particular, Ireland’s relationship with the UK is still very important, for a variety of reasons (see Chapter 1). While the nature of this relationship may have altered significantly, its substance has remained the same.
In terms of simple geography, Ireland is a tiny country, an island to the west of Britain, which in turn is a somewhat larger but much more densely populated island to the west of mainland Europe: its population is over 15 times that of Ireland. Ireland and the UK have a common labour market, a common language, and huge trade and tourism flows in both directions; by and large people in both jurisdictions watch the same TV programmes and follow similar key sports and cultural events. These are inescapable facts, which, as shall be seen throughout the book, are important for an understanding of the Irish economy, past and present.
Ireland’s relationship with its closest neighbour is crucial not just to its economic success but also to continued peace on the island. This is because the island of Ireland consists of two political units, the larger portion of which forms the Republic of Ireland and the smaller portion Northern Ireland, which is part of the UK. This too has had an impact on economic, social and political life in the Republic.
This book is about the economy of the Republic of Ireland, and henceforth the terms ‘economy of Ireland’ and ‘Irish economy’ refer to this economy, unless otherwise stated. Some reference is made to the Northern Ireland economy, but since Northern Ireland’s economic policy is largely determined in London, it is difficult to devote much attention to policy there without also reviewing British economic policy in general. There has been, though, as Chapter 3 points out, greatly increased cross-border co-operation on the economic front since the Good Friday Agreement of sixteen years ago.
The links, economic and cultural, to continental Europe are strengthening, something that low-cost air travel and the use of the euro has facilitated. Irish people are now much more familiar than they were even 25 years ago with political developments in Europe, and with European sporting and cultural events. Indeed as a result of the previous boom in incomes many own second homes there.
But Ireland and the EU have also to look at the wider world, as issues and problems that are truly global in nature must be addressed. Top of the list is the environment and the danger of serious global warming (see Chapter 10). Not far behind are a secure energy supply, terrorism, free trade, sharply increased world food prices resulting from new demands for food and land use (see Chapter 11), increased migration, legal and illegal, and international crime.
As Chapters 2 and 10 point out, concerns about environmental degradation must qualify any endorsement of economic growth as a policy objective. Chapter 3, though, highlights the governance difficulties faced when dealing with environmental issues that extend beyond national boundaries. This, as seen already, also applies to many financial issues. Later chapters discuss various policy measures being adopted to address such issues, both within Ireland and internationally.
The rise of China and India in particular is an economic reality that has affected not just small countries like Ireland but also the two largest trading blocs in the world, namely the EU and the USA. It has led to a huge increase in competition, for both goods and investment flows. It has also of course led to a huge increase in trade and investment opportunities.
China hosted the Olympic Games in 2008, its military prowess is growing, and Mandarin is the mother tongue for by far the largest number of people in the world. As such, its influence will soon extend well beyond the economic to the cultural and military spheres. Ireland, as part of the larger EU, will have to learn to adapt to such seismic geopolitical changes in the global economy.
