Ireland, Rise and fall of the Celtic Tiger
INB-300 International Business Abstract
This paper will attempt to summarize the rise and fall of the Irish Celtic Tiger. The paper will begin with a brief description of Irish history and religion. A map will be utilized as a reference to provide Ireland’s geographical location and reference to other European nations. The paper will discuss the factors that influenced the Irish name “Celtic Tiger” and the rise thereof. It will examine Irish policy maker’s decisions that set the stage for unprecedented economic stature. The paper will then transition to the changes and decisions that led to the fall of the Celtic Tiger and near bankruptcy of the government. Specific discussions will include the real estate bubble, unemployment, exports, emigration and currency. Then the paper will describe the unsupported bail out negotiated with the EU/IMF. In conclusion the paper will discuss the end of one ruling party and entry of a new government and the challenges they are faced with in light of the country’s economic situation.
References
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Associated Press. (2011). Ireland Upper House Passes Financial Bailout Bill. Pitsburgh Post-Gazette. Retrieved March 17, 2011 from http://ehis.ebscohost.com
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Kaller, B. (2011). Wreck of the Irish. American Conservative, Vol. 10 Issue 3. Retrieved March 17, 2011 from http://ehis.ebscohost.com
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Ireland is located in Far Western Europe, in the North Atlantic Ocean, and separated from Great Britain by Saint George's Channel on the south-east, the Irish Sea on the east, and the North Channel on the north-east. Politically, the island is divided into Northern Ireland, a constituent part of Great Britain, and the Republic of Ireland, formerly Eire. The island is divided into four historical provinces-Connaught (Connacht), Leinster, Munster, and Ulster-and administrative units called counties. The Republic of Ireland consists of Connaught, Leinster, and Munster provinces, totaling 23 counties, and in the north, 3 counties of Ulster Province. This paper will focus on the Republic of Ireland with some references to Northern Ireland. The republic of Ireland geographically covers 27,136 square miles (Ireland on the Map, 2011)
The predominant religion in Ireland is Christianity, with the largest church being the Roman Catholic Church. Ireland's constitution states that the state may not endorse any particular religion and guarantees freedom of religion. In 2006, 86.8% of the population identified themselves as Roman Catholic (Wikipedia, 2011).
Ireland was traditionally a rural economy based upon agriculture and fishing. Ireland may have been best known to most Americans for Saint Patrick’s Day celebrations, leprechauns, Celtic crosses and shamrocks. Until recently Irelands largest exports were U2, Guinness beer and people, emigration will be discussed later (Mules, 2007). According to kaller (2011) Ireland had one of the lowest gross domestic products (GDP) in the western world. Ireland should be recognized for the country that has produced the highest rations of Noble Prize winners per capita in the world. On the other hand Ireland remained very behind times, for example, divorce remained illegal until 1995. According to Kaller (2011) “Ireland was an anomaly on the world stage, a European third world country” (p. 6).
Ireland on the Map. (2011)
Over the past three decades Ireland has gone through several huge transformations, they went from one of the poorest countries in the European Union (EU) to one of the richest, earning the name ‘Celtic Tiger’, and then back to one of the most economically troubled countries within the EU seemingly overnight (Mules, 2007).
Ireland joined the European Union when it was called the Common Market in 1973. Membership of the European Union has provided Irish businesses and foreign businesses, including American, based in Ireland with more open access to European markets. It also provided essential funds needed to build infrastructure and to invest in education and training, again useful for Irish based businesses (Mules, 2007) Ireland implemented what was seen as a very favorable corporate taxation rate of 12.5 percent, which was and still continues to attract foreign investors, especially from the United States where the corporate tax is 35 percent. This tax rate remains less than half of those competing global developed or developing countries. This tax rate among other measure implemented by Irish policy makers resulted in an influx of multinational corporations (MNCs). MNC’s played a critical role in the rapid growth and economic development of Ireland; they brought investment funds, new technology and innovative ideas, as well as access to overseas markets (Mules, 2007). Besides cutting corporate taxes policy makers dumped money into higher education, aggressively deregulated trade and courted multinational companies that were desperate to get away from the slow growth, red tape and continental Europe. This theory worked exceptionally well demonstrated by Ireland economic growth of more than 6% per year for more than a decade; hence rise of the Celtic tiger (Kapell & Fitzgerald, 2008).
To further demonstrate their support of International trade the Irish Government, in 1987, established the International Financial Services Centre (IFSC) in Dublin. The IFSC was a building development which included offices, education institutions, housing, restaurants and shops, as well as legal firms, accountants and taxation specialists. All of these specialist services were located together to provide a ‘one stop shop’ designed to promote growth and development of Dublin as a financial center. Many of the world’s top banks and insurance companies quickly opened offices there, companies such as Merrill Lynch and Citibank, for example (Mules, 2007).
This focus resulted in IT companies moving to Ireland in hoards, according to Kaller (2011). The economy roared to life, overthrowing everyone’s expectations. One by one, tech companies set up shop outside Dublin and Cork—Intel, Dell, IBM, Hewlett- Packard, Microsoft—drawn by low corporate taxes, a convenient time zone, and an English-speaking workforce. In the space of just 10 years, a country smaller in size and population than South Carolina became, according to some estimates, the world’s number one exporter of software (Kaller, 2011).
Kaller (2011) concluded in his article, Wreck of the Irish, that as the “Celtic Tiger,” Ireland rose from 22nd in per capita GDP to fourth place in international rankings. Unemployment fell from almost 20 percent to 4 percent. By 2005 Economists studies ranked Ireland as the best place to live in the world (Kaller, 2011). Thousands of Irish emigrants returned home, and Eastern Europeans flooded in to fill service jobs. Ireland quickly rose from third world status to a new class of rich. Kaller (2011) stated that “Ireland had arrived like Cinderella at the ball” (p.6).
Unfortunately the same political leaders that led the Rise of the Celtic tiger began making a series of mistakes that would soon result in its fall from stardom. Considered poor management by many was the lack of almost any infrastructure development during the booming years. Highways were nonexistent making a 40 mile round trip on backwoods country roads a 3 hour drive compared to the US where highways and interstates make a 40 mile drive less than 30 minutes in most cases. There was little effort to improve other infrastructure basics including internet service. In 2005 a report very poorly ranked Ireland 25th out of 32 nations in internet service (Kaller (2011). Kaller (2011) made this comparison; Ireland was “a historically poor country that won the lottery and didn’t spend it wisely before disaster struck” (p. 8)
One of the largest nails in the Celtic Tigers coffin was a huge real estate bubble; by 2007 the pinch was being felt. Prior to 2007 Ireland had enjoyed the greatest housing boom on record in the world (Kapell & Fitzgerald, 2008). At the height of the bubble average housing prices topped $490, 000, an increase of more than 300% as compared to only one decade ago. In comparison, the real estate bubble in the US only rose to approximately 130%. New home construction accounted for up to 12% of the economy in Ireland and included more than 90,000 new homes, this number was more than double what was the country needed (Kapell & Fitzgerald, 2008). Crash of the real estate bubble lead to more than 200,000 construction workers being unemployed, and could potentially cost taxpayers more than $34 billion (Kapell, 2010). The housing bubble would also ultimately lead to a 2008 banking crisis described later.
By 2007 one of Irelands biggest growth engines, exports were at a crawl. The euro began to surge heavily against the dollar and the sterling its two biggest trading partners. Wages that were one of the largest attractions for MNC’s and were among the lowest in Western Europe, soared higher than comparable U.S. wages almost overnight. As stated by Kapell & Fitzgerald (2008) “According to the Bureau of Labor Statistics, average hourly pay for manufacturing workers in 2006 was $23.82 in the U.S., $25.96 in Ireland, and just $4.99 in Poland”. Suddenly Ireland’s very attractive foreign investment model is under attack by its competitors that learn quickly from its success, the European commission begins to harmonize tax rates across Europe. Many MNC’s begin to rethink their commitment to Ireland, they begin cutting jobs, closing facilities and postponing any future plans for development. Ireland had just got too expensive. By 2010 the once excess budget of 2007 ended in a 12% deficit of gross domestic product (GDP) ultimately reaching more than 32%. By 2010 more than 170,000 jobs were lost and another 76,000 were predicted to be lost in 2011 (Kapell, 2010). As stated by Kapell (2010) “Former Intel Chairman Craig R. Barrett says that of the 14 reasons Intel came to Ireland two decades ago, only one remained: low corporate tax rate of 12.5%” (p. 3).
The lack of jobs was causing another large surge in emigration, as Ireland was once better known for than over the past few decades. The higher education contributed to by policy makers was paying off for other countries as highly educated students are forced to find work away from native Ireland. The inability to find work at home will result in Ireland loosing generations of graduates. Emigration once again is exceeding immigration as 65,100 people flee the country in search of jobs. Some of these emigrants are recent immigrants in Ireland for the previous decade’s prosperity now fleeing. Countries like Australia and Poland are seeking, through job fairs, the highly educated English speaking graduates that are motivated and ready to work (Kapell, 2010). As jobs disappear unemployment shoots from 5.5% to 13.2% (Smith, 2011)
The Irish pound was the currency of the Republic of Ireland until 2002. The Irish pound was superseded by the EURO on 1 January 1999, when the Irish pound legally became a subdivision of the euro. The Euro results in a major component restricting recovery from any recession. Since interest rates are set by the European Central Bank, Irish policy makers cannot adjust or intentionally weaken its currency or lower interest rates to assist with recovery (Kapell and Fitzgerald, 2008).
By September 2008 the Celtic Tiger had fallen and some were still unwilling to accept reality. In an effort to support the inevitable failure of the Irish banking system and seen as a major mistake, the Prime Minister, Brian Cowen, leader of the Fianna Fail party, announced that the government would guarantee 100 percent of all bank holdings in the nation. According to Kaller (2011) this was a promise to back everything owed by all six Irish banks for the next two years, a promise that equaled 9 times the already mounting national debt. Other nations began to worry about losing their own investors following this remarkable almost unbelievable offer by Ireland. Other European countries began offering similar reckless guarantees to keep their investors home. First was the UK, then Germany, the EU and ultimately the U.S. Unknowingly at that time Ireland had set the stage for a worldwide economic crash in one hasty decision. Kaller in his 2011 article quoted Financial Times columnist Wolfgang Muenchau who called the Irish Prime Ministers decision “one of the most catastrophic political decisions took in post war Europe” (p. 7). The failure of the Anglo Irish Bank and the catastrophically expensive blanket guarantee was viewed by many Irish as Cowen and his party’s attempt to protect its friends and supporters at the expense of the taxpayer (Smith, 2011).
Time for the Bail Out, with the country on the brink of bankruptcy and without public notification, November 2010 a team of international financial advisors arrived for an emergency government meeting. By cob that day the news was reporting that the meeting was a request by Ireland leaders for an EU and International monetary Fund (IMF) defining an unsupported bailout of the Irish financial crisis. Citizens were informed that the banking system had crashed and values had plummeted, only worsened by immediate public response and pull out of any funds (Kaller, 2011).
In January 2011 Irish legislature passes the finance bill required to comply with the terms of the massive $115 billion international bailout package for Ireland (Associated Press, 2011). The finance plan and IMF funding is dependent upon Ireland cutting $20.56 billion from its deficit spending over the next four year period with the harshest prescribed tax cuts required in 2011. The finance bill included a 90% tax on any bonuses distributed to employees of Irish banks that need state support to survive the real estate collapse.
The passing of the bill set the stage for the obvious removal of Prime Minister Cowen and the entire Fianna fail party from leadership. Cowen was not only the Prime minister but was also the Finance minister from 2004 to 2008; he is widely blamed, in hindsight, for the slide of the Celtic tiger from feast to the brink of bankruptcy. In February, Cowen announced that he will not run for re-election and will dissolve the legislature in preparation for a national election. The passing of the finance bill would be the last piece of legislation handled by the exiting Fianna Fail minority government. Fianna Fail was expected to be replaced by a Fine Gael/Labour coalition with fine Gaels leader Enda Kenny set to become Prime minister (Associated Press, 2011).
Can a new government and new strategy save Ireland even with EU/IMF assistance? As anticipated the Fine Gael/Labour party prevails at election where the former party is punished and receives less than 15% support. With the country in financial dire straits the new government is strapped to an austerity strategy and $115 billion dollars in loans from the EU/IMF that come with many restrictions, anticipated to make recovery slow and difficult. The new government wants to end the previous party’s cronyism policy and practice in trade for qualified candidates in appropriate positions. The new government also plans to seek and renegotiate new terms with the EU/IMF that will hopefully speed the recovery.
Until the terms can be renegotiated Ireland must live to the terms of the loan in order to receive funds. Ireland must accomplish a restructure of its banking sector, it must reduce its budget deficit from the current 32% of GDP to 3% by 2015 (Underhill, 2011). The bailout agreement also calls for major cuts in the government services and financing that according to Tribune News Week (2011) “the Irish in general have considered to be so severe as to amount to selling off the country’s sovereignty” (p. 1). The new leadership has pledged to the Irish people that they will pursue less punishing terms with its creditors. Under these current terms and likely any new terms, the new government is unlikely to make an early or decisive change in the country’s circumstances.
According to O’Doud (2011) “Prime Minister Enda Kenny and Foreign Minister Eamon Gilmore, leaders of the two coalition parties, Fine Gael and Labour, have inherited a decrepit economy, 1,000 young people a week leaving and enough problems to give an aspirin a headache” (p. 1). They are taking on the challenge openly and working hard to set a positive mood and perception of the new Government. They know that the old regime was seen as hopelessly corrupt and incompetent and that is exactly what they intend to work on first and change. They are going to great pains to show they will be fair, open and honest. They started by slashing their own salaries and cutting fat from the government’s budget of things like unnecessary limousines (O’Doud, 2011) Facts are that a country of only 4.3 million still owes Europe and the world large amounts of money that needs repaid (Tribune Business, 2011). The new government has a big job ahead of them and a lot of restrictions preventing any quick action. However, they do have a fresh start, positive attitude, and lots of valuable lessons learned.
