Ireland turns back

There's an old Irish joke which asks how many people stay sober at a wake. The answer is one, the corpse.

That kind of sardonic humour is, no doubt, serving the Irish well these days. After generations of being the poor country cousins of Europe, the Irish shook off their lethargy and turned themselves into the continent's dynamo over the last two decades. The Irish model - of building a social consensus for policy reforms to underpin strong growth - was visionary, bold and wildly successful.

And, sadly, it's also over. The global financial crisis hit Ireland like a Manny Pacquiao punch. The economy is in a tailspin, and the government is staring at fiscal collapse. Last week, it grudgingly allowed officials from the European Union, the European Central Bank and the International Monetary Fund to comb through the books of Irish banks. And while the government insists it has the money needed to continue operating through to next year, it has reluctantly agreed to a bailout orchestrated by the above bodies.

It's a pity, because Ireland seemed to be doing everything right. Its government was not spendthrift like Greece's, and it didn't practise Greek-style bookkeeping (which would have made Enron's accountants gasp with admiration). Real structural change, not just an influx of capital, had driven the Irish boom, which at one point made it very nearly the richest country of Europe.

Well, it was doing almost everything right. Unfortunately, its banks bought all the hype about the Irish miracle. Convinced that the good times would never end, they fuelled a speculative boom in property development which drove prices - and with that, their profits - to unimagined heights. By the time the global financial crisis hit in 2008, some Irish banks had over 80 per cent of their loan portfolio in the real estate market.

When the bust hit, and prices collapsed, several banks were faced with failure. Determined not to let them go under, the Irish government took on huge liabilities (they should have read about FINSAC). That looks to have been a big mistake. The result is that today, the country's budget deficit has shot above 30 per cent of GDP.

Some say the root of Ireland's problems, like Greece's - or for that matter, Portugal's and Spain's - is the euro. At one time, governments that lived beyond their means were punished with declining currencies, high interest rates on their bonds, and the consequent slow growth (they definitely should have read about FINSAC).

Then the euro came, stability was assured, and everyone assumed the penny-pinching Germans would backstop everyone. As Chancellor Angela Merkel put it, Germany's government behaved like a Swabian housewife, and lived within her means. Investors thus judged that because it had bought into the euro, in a pinch, Berlin would use its savings to bail out its neighbours. As a result, bond yields fell across much of Europe, and times seemed pretty good. But governments, and private investors, got ahead of themselves.

Budget cuts

So when the crisis hit, the Germans had to choose whether to stand by their neighbours, or leave them out in the rain. The German government has decided to stand by the euro. But the price for its support will be steep: savage budget cuts. And the Germans, like the EU, are anxious to push a bailout on the reluctant Irish, sooner rather than later. Already, bond yields in Portugal and Spain are rising, as investors fear a contagion. Nipping this crisis in the bud is the priority in Berlin and Brussels.

Old cynics bemoan that by imposing their ways on the rest of Europe, the Germans are doing with the euro what they failed to do with their armies. But try telling that to Swabian housewives, of whom many would like nothing more than to cut off their spendthrift neighbours and return Germany to the deutschmark.

But let's face it, if you spent the sunny season building a house while others played in the fields, you get to decide who can come inside when the rains return. And if that means making them do a few more chores around the house, it's kind of hard to argue.

John Rapley is president of the Caribbean Policy Research Institute, an independent research think tank affiliated with the University of the West Indies, Mona. Feedback may be sent to columns@gleanerjm.com.