Recession: the bad luck of the Irish...
It was once hailed as the best place to live in the world. Now it’s in the grip of a terrifying economic storm. Could Ireland be the first euro country to go bust?
In Ireland, the biggest funerals take place in the smallest churches. St Mochta’s, on Dublin’s western fringes, is little bigger than a front room. So many mourners turned up for the funeral of Patrick Rocca that they spilt out onto the pavement. Anyone who is anyone in modern Ireland was there, huddled together under a sky the colour of a day-old bruise.
Politicians, pop stars, billionaire developers, horsemen and the sporting elite. Even the paparazzi. Rocca would have liked that. The 42-year-old was the self-styled poster boy for the new, resurgent Ireland, with a glamorous wife, private planes and helicopters, and a property business worth, at its peak in 2007, €450m. But one morning in January, he snapped. The first sign that anything was wrong was when neighbours saw him walking round the garden of his €5m house in Holmeleigh, an exclusive residential enclave of Dublin, in pyjamas. When his wife, Annette, returned home just before 9am after taking the couple’s two sons to school, she found her husband dead in the hall. He had shot himself in the head with a shotgun. The morning papers revealed the value of his business had collapsed to as little as €14m, with debts of €18m.
Rocca’s funeral was not simply a wake for one man. To many, the bells that rang out as the hearse pulled away were a lament for a nation. The Celtic tiger that transformed a beer-soaked backwater into the envy of every small nation with a thirst for a makeover is dead, and its cubs are looking to emigrate because they see no future. The signs, big and small, are everywhere. One bank, Anglo Irish, the country’s third largest, has been nationalised, and the government is negotiating bail-outs for two more. Foreign firms, notably Dell computers, are shutting factories. The family china — Waterford Wedgwood — is being sold off. Guinness has put its plans to build a €1 billion “super-brewery” into cold storage. Crowds at the horse races are down 10% and on-course betting has dropped 18%. In the most remarkable reversal of economic fortune, Poland, whose workers flocked to Ireland in the go-go years, has started hosting job fairs to attract unemployed Irish workers to Warsaw. The ad slogan? “Come to the new Ireland.”
Paddies heading for Poland? Surely it can’t be that bad? Unfortunately, it can. If you think the British economy is a mess, spare a thought for the neighbours. Ireland had a bigger boom and is now suffering a bigger bust, with fewer resources to dig itself out of the hole. In his cramped, pamphlet-strewn office on the banks of the Liffey, Professor John FitzGerald, an economist at the Economic and Social Res-earch Institute and the son of the former taoiseach, Garret Fitz-Gerald, confirms that salaries are falling, house prices have slumped by a third, the stock market is at a 14-year low, and unemployment is set to hit 12% by the end of the year. Ireland recently became the first western European country to have its top-notch credit rating downgraded from stable to negative by the ratings agencies Moody’s and Standard & Poor’s. This year, the budget deficit will reach 10%, the highest in the EU, and the government concedes the economy will shrink by 6.5%, compared with 2-3% in the UK. “This is a dramatically bigger shock for Ireland than for the UK,” FitzGerald says.
Things are so bad that Nouriel Roubini, the New York banker nicknamed Dr Doom because he predicted the global crash, says Ireland could be the next country to go bust after Iceland. He points out that Ireland got richer faster than Iceland, in much the same way, and now has many of the same problems. “If a big institution in Ireland were in trouble,” he says, “the country does not have the resources to bail them out.” Government pledges to support the banking sector by honouring all the country’s bank deposits amount to 250% of annual economic output. Ministers acknowledge the risk. In the words of Brian Lenihan, finance minister, the eco-nomy has “fallen off a cliff”. Here, MPs are so worried about default that they are advising British savers to withdraw their money from Post Office accounts, whose savings scheme is run by the Bank of Ireland. This being Ire-land, there’s a joke about it all. “What’s the capital of Ireland?” they ask. “Oh, about 20 euros.”
Those who have lost their jobs are hardly laughing. Ciaran Costello’s voice betrays anguish bordering on physical pain when he tells a tale typical of Ireland’s boom and bust. He fed and rode the Celtic tiger. He got the job, accounts manager for a luxury housing developer; the house, a three-bedroom semi in Longford, west of Dublin; and the car, a Mercedes. But then the beast devoured him. Last autumn the developer went bust and he was laid off. He could not keep up payments on the house or the car and they were repossessed. Now back home with his parents, he has decided his best business plan is to leave, but he can’t follow in his grandfather’s footsteps and head for the US “because the arse has fallen out of the economy there, too”. Instead, he’s heading for Beijing. “I’ve got a friend there who is making good money as a driver, and he says he can set me up with something. If that doesn’t work, I’ll try Australia. Living here is like whistling in a graveyard.”
What makes Ireland’s fall particularly depressing — and, to men like Costello, bewildering — is that not so long ago the Emerald Isle was the best place to live in Europe. Officially. In 2004 The Economist declared that the country’s low-tax, high-growth economy, its high-quality education and natural beauty gave it an overall quality of life unmatched anywhere in the world. The country “combines the most desirable elements of the new, such as low unemployment… with the preservation of elements of the old, such as stable family and community life,” it said. The data certainly appeared to confirm that a threadbare land of saints and scholars had become the Singapore of Europe. There was record investment in farming and infrastructure. Low taxes and a skilled workforce were attracting foreign investment by high-tech manufacturers. Jobs were so plentiful that, for the first time in modern Irish history, more people were arriving in the country than leaving. The number of foreign workers rose from 1% of the population to over 12%, sending it towards levels last seen before the potato famine.
The boom changed much more than the economy: it transformed traditional Irish society, culture, even religion. John O’Keeffe saw the changes more clearly than most. He left Dublin in 1986 and worked for Swiss Bank Corporation and Barings in London before returning in 2000 to a country where only the rain seemed familiar. Sitting at the bar of the Residence private members’ club, O’Keeffe, now the editor of Irish Entrepreneur, says: “I left a godly land of broke but merry alcoholics and came back to a place where people who used to dig potatoes were buying luxury apartments sight-unseen and driving Porsches. It was worse than the 1980s boom that I lived through in London because it was so un-Irish, so the selfishness, the vulgarity seemed worse. There were more divorces. On a Sunday the shops were full with people who seemed to worship Versace in the way our grandmothers worshipped the Virgin Mary.”
Ireland was livin’ it large and lovin’ it. But there was one big problem: what began as a boom was becoming a binge, and the worst sort — a property binge. “We started well enough. Ireland needed to grow, to play catch-up with the rest of Europe, but we ended up putting all our eggs in one basket,” says John Gilligan, mayor of Limerick. “Then the basket broke.” The uncomfortable truth is that Ireland is an economic model, but not in the way The Economist reported. In recent years, it has become a case study of how a small nation should not handle new-found riches. To understand why, you need to know about Section 23 and about the Galway Tent. But first you have to go to Doheny & Nesbitt, a pub in Dublin, take a seat in one of the oak snugs and order a pint of the black stuff. It’s here that it all started.
Doheny & Nesbitt is around the corner from the main government ministries and Ireland’s leading banks. Every night, politicians, bankers, businessmen and the odd holy man turn up to drink. “It’s the kind of place where you bump into the finance minister in the gents,” says Ronan Lyons, chief economist at Ireland’s biggest property website, Daft.ie, who is a regular. Every night conversation turns to politics and business. In the late 1980s, with the euro promising currency stability, a clutch of economists, politicians and civil servants planted the philosophical seeds for the Irish economic miracle. What if, their beery musings went, Ireland slashed taxes, reduced import duties and embraced foreign investment; then adopted the euro, giving it access to a much bigger capital market and enabling it to enjoy increased investment from Brussels and low interest rates set by the European Central Bank (ECB); and finally threw in traditional advantages — cheap labour, the English language and GMT? In the new globalised market, surely this would create economic alchemy, turning the base metal of Irish productivity into pure (Kerry) gold?
The new economic model, known as the “Doheny & Nesbitt School”, soon became government policy. It brought huge benefits. Thanks to EU investment, so many new roads and railways were built that the wealthier residents of the north looked over the border in envy for the first time. Low taxes and low interest rates lured foreign multinationals, notably high-tech giants such as Intel and Google, pharmaceutical firms and financial-services outfits, which chose Ireland as a platform from which to operate in the eurozone. A new tax rule, Section 23, encouraged developers to build, by allowing them to offset construction costs against tax. With banks offering low-interest mortgages with no money down, Ireland’s construction industry exploded. Developers were so successful they became cultural figures, much like the hedge-fund and private-equity elite in London and New York. Come August, many were found hobnobbing with decision-makers in the Fianna Fail tent at the Galway Races, a pint of Guinness in one hand and a champagne flute in the other.
There’s no doubt that the Doheny & Nesbitt strategy was the right policy, in the right place, at the right time. “We rode global trends perfectly for 15 years,” says Lyons. From 1987 to 2003, gross domestic product per person rose from 70% of the EU average to 136%, while unemployment sank to 4% from 17%. GDP growth regularly touched an astonishing 10% a year — three times the EU average. The number of euro millionaires rose a hundredfold. Ireland was transformed from one of the poorest countries in western Europe into the fourth richest country in the Organisation for Economic Cooperation and Development, wealthier than Britain or the US. Thanks to growing tax revenue, the government could increase its spending dramatically and still run a fiscal surplus. It was, it seemed, wealth built upon wealth.
But you can have too much of a good thing. By 2000, there were signs that the boom was not creating wealth, it was simply inflating a vast property bubble. When the economic analyst Dr Alan Ahearne arrived in Ireland shortly after the millennium after working for the US Federal Reserve, he was “profoundly shocked” by what he saw. Bank lending, mainly to developers and homeowners, was rising by 30% annually. Anglo Irish bank ended up lending an amount equivalent to twice the national debt. House prices, quadrupling every 10 years, were outpacing incomes and rents by more than five to one. Household debt as a percentage of GDP had jumped from 60% to almost 200%, the highest figure in the developed world. To put this into perspective, at the height of Britain’s real-estate boom, the property sector accounted for less than 10% of the economy. In Ireland the figure was almost 25%.
Commentators, notably FitzGerald, began war-ning that Ireland risked throwing away the gains of the Celtic tiger years. But ministers rejected calls to raise taxes to choke housing demand. Indeed, when the economy began to slow, in 2006, the government cut taxes, further inflating the bubble. Last September, when the banks imploded and lending stopped overnight, the value of assets plummeted and Ireland became the first country in the eurozone to sink into recession. The casualties? Such unlikely bedfellows as Warren Buffett, whose bank investments turned sour, and the Trainspotting author, Irvine Welsh, who could not sell his Dublin home.
Looking back, those who got caught up in the euphoria feel like fools. Gerald Kean is Ireland’s most high-profile solicitor. He represents Boyzone and is a star of Celebrity Bainisteoir, Ireland’s version of Celebrity Apprentice. His 50th birthday was a €100,000 Louis XV-themed party at the Ritz-Carlton in Dublin. Over a medium entrecôte and a glass of his favourite Portuguese red at Dublin’s fashionable Dax restaurant, he says: “The Irish are welcoming people. Greed came knocking at our door. We welcomed it in, fed it, and let it stay. Then it started eating us up.” Who’s to blame? “We all are. The banks for lending too much. The regulator for not stopping them. Ministers for not pricking the bubble before it got too big. Consumers for believing the hype and not putting anything aside for a rainy day.”
Out of luck and lucre, could Ireland really go bust? On the streets of Limerick, it looks like it already has. Unemployment there is 14% and the town is about to suffer the loss of 2,000 direct jobs and perhaps a further 8,000 indirect posts following Dell’s decision to close its Raheen laptop factory and shift production to Poland, taking almost 4% of GDP with it. Hotels are closing and snazzy new homes lie empty. On Cruises Street, the main drag, every shop has a sale on, with discounts of up to 80%. In the worst estates, where unemployment is 70%, corner shops sell single cigarettes and single tea bags. Economists use the pyjama index to track poverty: they count the number of people walking around the street in their pyjamas because they see no point in getting dressed. Whole neighbourhoods are fighting chronic crime, drug abuse and the most violent gang warfare in Europe. Recently a man accused of not repaying debts to a local family saw his children doused in petrol and set on fire. They suffered dreadful burns but survived.
As he drives his ageing Ford Fiesta past shops advertising free false teeth repairs for new customers, Dr Stephen Kinsella, an economist who left New York for Limerick three years ago, says the town sums up the problem Ireland faces. “We’re confronting the perfect economic storm. We have the housing bust and liquidity problems other economies have, only ours are worse. At the same time, our traditional economic model — ‘We’re cheap, wages and tax are low, and we’re in the Euro’ — is collapsing.” He explains the housing boom pushed wages 20% above the European norm. Taxes, once low, are going to have to rise to pay off public debt. Even the currency is now a problem, with the strength of the euro making exports more expensive. Export trade is critical for the Irish economy because four-fifths of what it produces is sold abroad.
All the elements that fuelled the boom now seem to be deepening the bust. As a member of the eurozone, Ireland cannot devalue its currency, print money or cut interest rates, as Britain and America are doing. Instead of increasing spending to keep demand high, ministers are cutting public spending by €2 billion, about 1% of GDP, to reduce the €20 billion hole in the government’s finances — a move that will deepen the recession. Economists are worried. Simon John-son, the former chief economist of the IMF, points out that debt market investors now rank Ireland as the most troubled economy in Europe. He is urging the world’s leaders, who meet at the G20 summit in London this week, to come up with “a plan of action for Ireland. We need it and we need it now. Does the European Union come in to help? Is this a job for the IMF? And don’t tell me, ‘The Irish have to sort this out for themselves.’ Eventually, the world always comes to help; check your notes on Iceland”.
Irish ministers dismiss fears that Dublin is Reykjavik-on-Liffey. At a recent meeting with Gordon Brown in London, the finance minister Lenihan insisted that if the worst happened the EU would come to Ireland’s rescue. Iceland, he pointed out, was outside the EU. “The ECB has been a great support to the liquidity of the Irish banking system,” he said. But an EU bail-out is not guaranteed. The ECB hardly wants to be seen to be rewarding bad behaviour by helping a government that has run up a deficit over three times higher than the EU’s guideline of 3% of GDP.
Apart from cutting spending, the only room for manoeuvre that the taoiseach, Brian Cowen, has is in wage rates and taxes. He is forcing through wage cuts of around 10% in the bloated public sector that built up during the boom years when government and unions cemented a strong social partnership. He has pledged fresh spending cuts and tax hikes in an emergency budget next month. Cowen insists Ireland has no choice but to swallow a bitter pill. “We have to save billions. The political decision had to be made.” But he is ill-placed to sell acceptance of five years of austerity. Three out of four voters say his handling of the crisis has been poor and blame him for failing to do more to safeguard jobs at Waterford Wedgwood and Dell.
The anger on the streets is so great there’s a whiff of revolution in the air. Last month 120,000 people staged the biggest mass rally in 30 years to protest against pay cuts and job losses, and unions are threatening a “Doomsday” national strike if Cowen does not reverse his policy. One key difference between public reaction to the slump in Britain and Ireland is that, with Ireland part of the eurozone, anger is not directed at foreign workers — as it was in the recent dispute between British and Italian workers at a Lincolnshire oil refinery — but at the government. This makes unrest on a large scale more likely.
Even if Cowen’s medicine does somehow go down, where will the new jobs Ireland desperately needs come from? Irish people are good entrepreneurs — just not in Ireland. US boardrooms are full of Irish names. In Britain, there’s Tesco’s Terry Leahy, British Airways’ Willie Walsh, and Niall FitzGerald, Unilever’s former boss. Ryanair is the only home-grown Irish world-beater. “What Ireland needs now is to become a Ryanair economy,” says Kinsella. “We need to use the benefits of the boom — better education, better infrastructure — to find the next generation of entrepreneurs.”
“More Michael O’Learys? Jesus! One’s enough,” says the gobby boss of Ryanair, which has grown so fast it now carries twice as many passengers as BA. O’Leary’s office, on a drab industrial estate next to Dublin airport, scarcely looks like the future. It’s so spartan there’s no heating in the lavatories. But O’Leary is anything but gloomy. In fact, he’s so bullish about economic prospects that he has just ordered 300-400 new Boeing and Airbus aircraft at a cost of €100 billion. “This recession is fantastic. After 10 years of economic lunacy in this country, it’s absolutely necessary. Now we can start again and do things properly,” he says. “There’s never been more opportunity. Interest rates have never been lower. Oil is cheap. There’s no pressure on wages. This is the time when good businesses start up, grow and go out and gear up for the next five or six years of growth. We’ve got to just accept our losses, work harder and we’ll get there.”
As they eye the economic horizon nervously, what most people on the streets of Dublin, Limerick, Cork and Waterford are wondering is whether Ireland would have been better off without the boom? Was Ireland a foolish little nation that thought it had found a new way of getting rich but forgot to ask where the money was coming from? In spite of current woes, most say no.
Standing next to the vast steel spire on O’Connell Street, built on the site of the old Nelson’s Column blown up by the IRA as a defiant symbol of the new Ireland, Kean says the Celtic tiger “helped us to get over our inferiority complex and find a little much-needed swagger and self-belief. Our creativity increased and we made new friends abroad. We lost our farmers-cutting-peat image, got serious and joined the modern world. That won’t go away, however embarrassed we might be at how carried away we got”.
With a knowing smile, he recalls the excesses of the boom. “I’ll never forget the day I went to this big house in Dublin and the lady of the house said there had been a leak in the roof. Then she said, ‘It came through into the maid’s room, then the master bedroom, then the drawing room, then the cinema, then the games room, then the wine cellar, then the second garage, then the gymna-sium and into the panic room.’ People were living in houses that should have been in Beverly Hills, not the Dublin Hills, and with prices to match. We thought we were better than anyone, better than California, better than Sheikh Mohammed.
We’ll tell our grandchildren all about it and you know what?” He pauses and grins. “They’ll think we’re telling fairy stories.”
Report by John Arlidge - UK Sunday Times