Ireland faces a tough road to economic recovery...
LIMERICK , Ireland – Hard times.
You took out a second mortgage to fix up the house. Then in 2008, Ireland's housing bubble burst. A year later, Dell Inc. closed its Limerick laptop factory, putting you and 2,000 others out of work. You're 58 and unemployed, and your home is financially underwater.
Gerry Hinchy is fighting with Dell and his bank for better terms. But he knows the manufacturing work and the property boom are gone.
"It won't come back. They can turn the screw in China for 50 cents an hour," he said.
"What's done is done. The question now is how to get out of it."
To overcome a decade of debt-driven growth, Ireland is gutting its way through one of the world's toughest austerity efforts. Economists here say Americans eventually will face the same belt-tightening to reduce the debts of government, businesses and consumers.
The Irish say they could not wait. As one of 16 countries using the euro currency, Ireland could not devalue and hope for stronger overseas sales. Instead, it did what's called an "internal devaluation," lowering costs and wages to improve competitiveness.
"Ireland didn't have a choice," said John FitzGerald of Dublin's Economic and Social Research Institute. "This was our mess, and we had to work our own way out of it."
The first order of business was to save the banks from collapse, and that's coming at a high price for taxpayers. Then the government put down a plan for bringing its deficit under control. Next, business, labor and government agreed to cut wages, spending and prices so Ireland could regain its global edge.
Twenty years ago, that edge was keen. Ireland attracted hundreds of American companies with its low corporate income tax, low wages and well-educated population. Now its workers, managers and lawyers make more money than Americans.
Before the fall, Ireland's per-capita income was nearly the highest in Europe, trailing only that of tiny Luxembourg.
"There is an understanding, a broad consensus, really, that we paid ourselves too much and we need to get real," said Bill Doherty, head of medical device maker Cook Ireland, the Irish subsidiary of Cook Medical Inc. of Bloomington, Ind.
The austerity program is helping exporters such as Cook and Dell. The Round Rock, Texas-based computer firm still has 2,300 employees in Limerick and Dublin focused on research and services. Ireland's exporters are gaining market share as their costs come down.
"We're about two-thirds of the way back," said Brian Cotter of the American Chamber of Commerce in Ireland.
For ordinary Irish men and women, however, this austerity bites hard. Wages are down roughly 6 percent. Government workers were hit with a 7.5 percent increase in paycheck pension contributions, followed by salary cuts ranging from 8 percent to 20 percent.
Health and welfare spending was cut. Taxes were raised.
Unemployment has climbed from 4.2 percent in 2007 to 13.6 percent. The average price of a home in Ireland is down 43 percent and still falling, with declines of 50 percent already in Dublin.
Myles O'Shaughnessy, 59, worked in quality control for a packaging firm that tied its business to Dell's Limerick factory. Like Hinchy, he borrowed against his home with hope for the future. Now his two sons and daughter are looking to leave the country for work overseas.
"We're going to be looking at 20 years before this country of ours sees anything like a return to what we had," O'Shaughnessy said.
Ireland is slightly larger than West Virginia, with a population a third less than the Dallas-Fort Worth metro area (4.25 million vs. 6.35 million). The island is beaten and bathed by the North Atlantic. The landscape is famously green, but the sky is often gray.
Limerick, with a population of about 90,000, is known abroad for both whimsical poetry and the grim poverty of Frank McCourt's novel Angela's Ashes.
Up close, Limerick looks like a place with more retailers than customers. Sale signs are ubiquitous. In the past two years, Irish clothing and footwear prices have dropped 27 percent. Department-store revenue is down 12 percent.
Real estate offices, known as "auctioneers and valuers," have moved beyond price slashing and instead advertise "offers invited."
Pat Kearney runs one such office in downtown Limerick. He remembers when customers queued outside his doors for days ahead of the opening of new housing developments.
"Some people were getting a 110 percent mortgage," he said. "They were lined up on the street Monday to Saturday for a chance to buy. It was mass hysteria."
A couple of blocks away, property manager Kersten Mehl added his own memories.
"There was no regulation, and the banks just went mad," he said. "They were throwing money out the door."
Mehl saw a crash coming and changed direction from selling to managing property.
"If I'm a small Mickey Mouse guy, and I can see in 2006 how this is going to end, how come not one member of the government, not one bank, not one bank board member, not one regulator saw it?" he said.
Makeover built on debt
What Ireland saw in the last decade was an economic makeover built on debt. The Celtic Tiger success of the 1990s relied on foreign investors who used Ireland as an export platform. In the past 10 years, that model gave way to a domestic builder's economy.
As in other parts of Europe and the United States, the building boom relied on cheap credit. Unlike with the U.S. housing bubble, Irish banks made risky loans without the benefit of complex securities that seemed to dilute the danger.
One bank in particular – Anglo Irish – plunged ahead with real estate lending heedless of the downside. When international financial markets crashed in late 2008, the Irish government guaranteed deposits in Anglo Irish and several other banks. But Anglo Irish's loan portfolio was so bad that the government was forced to nationalize it.
Faced with mounting losses and alarmed investors, the Irish government announced this month that it would break Anglo Irish into a savings bank for depositors and then wind down the rest of its operations. Earlier cost estimates of $31 billion are being revised upward and could come close to equaling the $43 billion paid in taxes last year.
The central government budget deficit this year amounts to 11.6 percent of gross domestic product, and the Irish government says it will reduce that to 3 percent of GDP within four years. If the cost of bailing out the banks is added to this year's spending, the deficit is more like 30 percent of GDP.
In 1997, average Irish household debt (mortgages, car loans, credit cards and so on) equaled average household income. By 2007, debt was nearly double that amount – 191 percent of household income. (Debt-to-income in the United States hit 130 percent that year).
The Irish debt mountain was nearly all in mortgages and property, rather than credit cards or car loans. About 75 percent of households own rather than rent, compared with an ownership peak in the United States of 69 percent in 2007. The Irish government encouraged homebuyers by, for instance, letting them deduct mortgage interest from their taxable income.
In turn, the government relied heavily on value-added, capital-gains and "stamp" taxes from homebuilding and property sales.
Irish builders went far overboard. There are 621 unfinished housing developments across the country (called "ghost estates"), containing more than 300,000 empty homes. One in four men under the age of 30 worked in construction. Many left school early to take advantage of the salaries offered during the boom.
The 400,000 jobs in construction three years ago have evaporated. By next year, there might be just 10,000 of those jobs left, said Helena Lenihan, assistant dean of the economics department at the University of Limerick.
"During the boom, everybody got caught up in the hype. Nobody wanted to rain on the parade, even though none of it made sense," she said.
More 'like Germans'
Three months after the property crash, Dell announced in January 2009 that it was closing its Limerick laptop plant.
"It's amazing that Dell stayed as long as it did," said Terry Quinn, an economic analyst with the Irish Central Bank. "They were involved in activities that years ago migrated to other lower-cost locations.
"We're not competing with Poland," Quinn said. "We're competing with countries like the Netherlands and Belgium."
Former Dell workers such as Gerry Hinchy don't think the Irish government has done enough to ease their plight. For those who took out a mortgage and then lost their jobs, the hardships are big.
"If you lose your job, you're dead," said Doherty, the Cook Ireland official. "You can't afford the house, and you can't afford to sell it."
That hazard weighs heavily on people who have kept their jobs as well. Polling over the last year done by the Dublin firm Amárach Research has shown that a steady 61 percent of the Irish consider paying off debts their "main financial priority."
Central Bank data shows that between March 2008 and March of this year, mortgage debt declined 12.25 percent.
Amárach Research chairman Gerard O'Neill said Irish consumers haven't quit buying; they're just far more price conscious.
"There's been a seismic shift in consumer behavior," he said. "We've become like Germans in that regard."
O'Neill's retailing clients are adapting.
"Things have changed, yes. But it's 2010, not 1910," he said. "If our clients listened only to the economists, they'd pack up shop and leave Depression Island."
One in an occasional series By JIM LANDERS - The Dallas Morning News.