How the Irish Bubble Burst
The Emerald Isles story is a microcosm of the global economic crisis.
23 February 2011
If you want to study the economic crisis of the last few years, go to Ireland, where you will find it in its purest form. Ireland is a small country, with a population of just 4.4 million, and the connection between clientelistic politics, bankers cupidity, and the mass psychology of bubble markets is easiest to comprehend there.
Dotted around the country, outside of almost every town and sometimes in the middle of nowhere, are housing estatescompleted, half-completed, and never-to-be-completedwhich are unsaleable, will almost certainly never be inhabited, and are destined to fall into graceless ruins. Some 300,000 new dwellings now stand empty in the Irish Republic, a number whose equivalent in the United States would be approximately 21 million.
The madness that gripped the country can be gauged from a few examples. A 25-acre piece of land on the edge of Dublin on which a derelict factory stood sold in 2006 for $550 million. After the banking collapse two years later, it was valued by the National Asset Management Administration, the public-sector organization set up to handle the banks toxic assets, at $80 million, a sum itself arbitrary in the absence of a flourishing market. The Anglo-Irish Bank, which eventually collapsed and left taxpayers a legacy of approximately $40 billion of debt, lent an average of $1.7 billion to each of six property developers; it lent more than $650 million each to another nine. A house in Shrewsbury Road, Dublin, sold for $80 million in 2005 but, now standing empty, is on the way to dereliction, and no house on the roada millionaires rowhas sold for the last two years, despite a fall in prices of at least 66 percent. During the boom, taxi drivers and shop assistants would tell you about the third or fourth house they had boughton borrowed money, of courseand of their apartments in Europe, from Malaga to Budapest to the Black Sea Coast of Bulgaria. It was not so much a boom as a gold rush, or a modern reenactment of the Tulipomania.
All this would not have been possible were it not for the insouciance of foreign banks. The Royal Bank of Scotland alone lent $50 billion in Ireland. German banks extended $140 billion in credit and the British banks as much again. The champions, on a per capita basis, were the Belgians, weighing in at $57 billion. (The cautious Americans lent only $70 billion.) The gross external debt of Ireland is just a fraction less than half a million dollars per head, that is to say, more than $2 trillion in total. It is not difficult to see why a rescue was needed, or who was being rescued: not the Irish, but all of us.
During the boom, the governmentunder the direction of Irelands largest political party, Fianna Fáil, in power for most of the last 80 years and famous for its patronage networkincreased public-sector employment by 25 percent and also the rate of remuneration. The average public-service wage rose from $39,000 a year in 1998 to $64,000 in 2008, with pensions following suit, in return for a pledge not to go on strike.
This huge increase in expenditure no doubt cemented the political loyalty of its beneficiaries. The budget was balanced, but only superficially, in a narrow accounting sense, by means of tax receipts from construction and property deals whose size was grossly inflated by unsustainable borrowing from abroad. A balanced budget, then, is not by itself a sign of fiscal health.
When the music stopped and the Madoff-style pyramid collapsed, the government was left with obligations impossible to meet. Public service salaries have already been cut by as much as a quarter, with more to come; national sensibilities have been wounded by the fact that creditor nations, especially Germany, are dictating Irish policy; and, of course, political loyalties have evaporated. Fianna Fáil will almost certainly suffer the worst defeat in its history in the upcoming elections, though reports of its demise as a political force are premature. The subsequent government will have no choice but to pursue unpopular policies. Memories being short, no one will blame Fianna Fáil (a criminal organization, like the Mafia, said the banker son of an Irish friend of mine) for this necessity, instead remembering the good times under its rule.
Unemployment is now 13 percent in Ireland; it would be higher if 5 percent of the working-age population (principally the young and well-qualified) had not emigrated over the last two years. Other exports are doing well, and Ireland has a trade surplus, but nowhere big enough, alas, to service its debt. For the moment, to stave off the collapse of many banks, the necessary fiction that the country is not bankrupt is maintained (I was surprised by how full the restaurants were, but this might have been the orchestra playing on the Titanic). Default is not impossible, however, and some even advocate it.
Theodore Dalrymple, a physician, is a contributing editor of City Journal and the Dietrich Weismann Fellow at the Manhattan Institute.
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