13 March 2009
By Paul Gosling
The Irish economy, feted by Alex Salmond, might end up needing IMF support packages and could be evicted from the eurozone. Now there is a concern that the effects will spread to Northern Ireland
It all looked so good – a Celtic Tiger that repeatedly produced annual growth of 9%. Scotland’s nationalist government even talked of an ‘arc of prosperity’ that drew together Ireland, Iceland and Scotland. Now it looks more like an arc of insolvency.
How life changes, as Ireland’s ministers will readily testify. It is not merely that Scottish First Minister Alex Salmond’s political strategy needs rethinking. Ireland’s economic situation is so bleak that there are suggestions of support packages from the International Monetary Fund and the European Union and even rumours that some EU countries want it to be evicted from the eurozone.
After months of trying to play down the scale of Ireland ’s fiscal crisis, Taoiseach Brian Cowen has now admitted that the country expects to lose €18bn of its projected €55bn tax revenues for this year. An emergency budget is tabled for next month.
Measures being considered include a new higher rate tax; an increase in the basic tax rate; and bringing more lower-paid workers into the tax bracket. There is also to be a clampdown on benefits cheats, including against the thousands of people living in the border regions of Northern Ireland who claim in the Republic instead, using false addresses to receive the more generous southern welfare.
Yet it was only in February that the government announced an earlier package of emergency measures: a cut in capital spending; a target of a 3% reduction in the public sector payroll; and a graduated pensions levy of up to 10% on public sector workers, which will save €1.4bn a year. The imposition of the levy pretty much ended the ‘social partnership’ with trade unions and led to unprecedented anger, with a demonstration of about 120,000 workers through Dublin.
Cowen warned: ‘The measures we are taking to restore our economy will be painful for all. Living standards will fall across the country, and we will need to adjust. Services will suffer in the short term, and we will need to be patient.’
Enda Kenny, leader of the opposition Fine Gael, has called on the government to raise or save €5bn. ‘With 354,000 unemployed, an 8% increase since last month, we have never in the history of the state been in such a position.’
But this week the governor of the central bank told MPs that the economy is set to shrink by 6% this year, which would make Ireland’s plight among the worst in Europe. He added that things could get even worse.
There are now serious concerns about the impact on Northern Ireland too. The Republic’s government had promised to spread its wealth northwards, assisting economic development in Northern Ireland by paying for the upgrade of transport links that service the all-Ireland economy – the Dublin to Derry and Belfast to Port of Larne roads and the City of Derry Airport, owned by its district council.
These worries are shared by the Northern Ireland Executive, which has met with ministers from the South. A spokeswoman for Northern Ireland’s Department of Finance and Personnel, commenting on rumours that the Irish government was set to drop some pan-Ireland projects, said: ‘This is speculation at this stage as no formal confirmation of this intention has been relayed to the Northern Ireland Executive.
‘The Irish government previously announced a range of projects in Northern Ireland that they would make a financial contribution towards. Until notified that this is no longer the case, we will proceed on that basis.’
But a spokesman for Ireland’s Department of Finance told Public Finance: ‘Given the current situation we are facing, the government will be looking at all aspects of expenditure, capital and current. It remains committed to North-South co-operation and exploring ways of working with the Northern Ireland Executive, within the current economic environment. There is still a commitment on the basis of what has been promised, but everything is on the table.’
If the Republic does pull back from its support for the North, it would be no surprise given the state of the Irish economy. There has been a series of major job loss announcements in recent months, with an 87% rise in those claiming jobseekers’ benefits in the past year.
Political pressures on the government are so severe that the the ruling Fianna Fail-Green Party coalition is at risk of collapsing. High-profile Green Party members have already resigned over the party’s involvement in service cuts. Fianna Fail is suffering badly in the polls.
And the banking crisis in the country puts that of the UK in the shade. One of the country’s leading banks, the Anglo Irish, has been nationalised, while the two largest, the Bank of Ireland and Allied Irish Banks, might be next. Support packages will probably be needed for the country’s two building societies, the Irish Nationwide (unconnected to the UK’s Nationwide) and EBS.
The financial sector had become the mainstay of the economy and it loaned massively for construction and property development. With property prices almost halving in Dublin in the past year, the banks are sitting on phenomenal losses and bad debts.
Worse still is a scandal that evokes images of Dublin cronyism. When Anglo Irish was at risk of breaching its regulatory deposit requirements, the Irish Life & Permanent stepped in with a short-term €7.45bn deposit, matched by a comparable payment from Anglo Irish into an ILP subsidiary. The transaction gave a misleading appearance of Anglo Irish’s deposit strength. ILP has since apologised.
Then when Anglo Irish’s share values fell, the bank loaned ten well-known businesspeople the money to buy a large quantity of shares. That had the effect of keeping the share price high. Because the loans were made on ‘non-recourse’ terms – the bank cannot get the money back – a share support operation has been retrospectively bankrolled by the Irish state.
And – the cherry on a rotten cake – the chair and former chief executive of Anglo Irish, Sean FitzPatrick, has admitted that he borrowed €129m from his own bank, without declaring this in the annual accounts. The loan was hidden by an arrangement with the Irish Nationwide Building Society. Anglo Irish is now the subject of a fraud investigation by the Irish police.
As details of these scandals have emerged, there has been a frenzied round of resignations of directors – not only from the boards of these financial institutions, but also from a range of other large companies and public infrastructure projects. It is not just the credibility of Ireland’s banking system that has suffered, but also that of the Irish government – whose pleas of ignorance of any wrongdoing are being treated with growing scepticism.
Even more than the global financial system, it is now clear that Dublin’s banking and property sectors were constructed on metaphorical quicksand. So too, it seems, was the Celtic Tiger.
PFmar2009
