Ireland’s economic situation deteriorated dramatically over the 2008 – 2010 period. As a consequence there is a stark contrast between the generally upbeat summary provided in November 2007 and the much more somber assessment that is called for following the close of the review period in April 2010.
Ireland’s economic crisis erupted suddenly. Although warning signs were visible by the middle of 2007, the scale of the problem became apparent only in the course of 2008. The crisis occurred on two fronts. First, the extraordinary boom in the Irish construction sector was beginning to crumble by 2007. This crash gathered pace during the following two years and had a devastating effect on employment, tax revenue and the level of consumer confidence. Second, the global financial crisis of 2008 exposed the exceptional fragility of the Irish banking system. This system was heavily exposed to (and indeed was partly the cause of) the unsustainable boom in property prices. This was based on an expansion of credit fed by interbank borrowing from global financial markets. In 2008 a collapse of the Irish banking system was averted only by the government’s blanket guarantee of all depositors in the main banks and building societies. It is debatable whether this guarantee should have been as all-encompassing as it was. Some of the institutions receiving guarantees were not of systemic importance to the Irish economy. By extending the guarantee so widely, the future cost to the Irish taxpayer was increased.
The government’s main defense of its economic strategy has been that the small and very open Irish economy was the victim of global financial turmoil. Policymakers have been reluctant to acknowledge the policy mistakes and weak management that aggravated the Irish crisis. Chief among these was the failure of the Irish financial regulatory system, with its emphasis on a “light touch, principles-based” approach, to take corrective action to moderate the credit-fuelled property boom. The questionable activities of rogue bank executives went undetected and uncorrected for far too long.
The weakness of the budgetary situation, and the growing resort to deficit financing, led to a downgrading of Ireland’s sovereign debt during 2008. The risk premium on Irish government bonds rose to 2.8 percentage points over comparable German bonds in March 2009. The austerity budgetary measures introduced since then have gone some way toward restoring international confidence in the Irish economy and the risk premium on Irish bonds has more than halved.
The “social partnership” model of cooperation between business, unions and government failed the test posed by the economic crisis. Talks between government, employers and trade unions on adapting to the crisis broke down toward the end of 2009. The model could not deliver consensus on how to share the painful adjustment necessitated by the deterioration in the public finances.
The political system came under severe strain during the review period. Following the resignation of the prime minister (Taoiseach) in April 2008, triggered by inquiries into his personal finances, the transition to a new prime minister (Brian Cowan) was smooth, but the economic and financial crisis put increasing strain on the ruling coalition. The Progressive Democrats (PD), one of the smaller parties in the ruling coalition, was dissolved in 2009, after a very bad election performance in 2007 in which the PD delegation to parliament declined from eight members to only two. Popular support for the Green Party, the remaining junior party in the coalition, also declined and the government’s overall rating in opinion polls fell to a record low. Three vacancies that have arisen in the lower parliamentary house (Dáil) are unlikely to be filled until the next general election, which does not have to be held until 2012.
One of the few positive achievements during this period was the successful campaign on the second referendum on the Lisbon Treaty. The first referendum was rejected with a 53% “no” vote in June 2008. The second referendum received a 67% “yes” vote in October 2009.