The Fall of the Celtic Tiger: Ireland and the Euro Debt Crisis
Sober macro account by a former IMF official; the counterweight to the journalism.
Summary
Donal Donovan spent his career at the International Monetary Fund and Antoin Murphy is an economist at Trinity College Dublin. Together they produced the most rigorous economic account of Ireland's boom and collapse.
Their analysis separates two distinct periods that popular accounts conflate. From roughly 1993 to 2000, Ireland experienced genuine export-led growth driven by foreign direct investment, education, European market access and a competitive cost base. From about 2000 to 2007, growth was driven by construction and by credit, funded by borrowing from European banks at interest rates set for a much larger and slower-growing economy. The first period was real convergence; the second was a bubble that reversed the competitiveness gains of the first.
They then cover the collapse: the property price fall, the bank losses, the September 2008 blanket guarantee that transferred bank liabilities to the state without any estimate of their size, the National Asset Management Agency, and the 2010 programme with the European Union and International Monetary Fund. Donovan's Fund background gives the account of the programme negotiation particular authority, including the disputes over whether senior bank bondholders should have been made to take losses, which the European Central Bank opposed. The book is measured and quantitative, and it is the reference account of the episode.
Key takeaways 7
- Ireland's growth from 1993 to 2000 was genuine export-led convergence, and the growth from 2000 to 2007 was a credit-funded construction bubble.
- Euro membership set interest rates for a much larger and slower economy, which produced negative real rates during Ireland's boom.
- The construction boom reversed the cost competitiveness that had produced the earlier export growth.
- The September 2008 blanket guarantee committed the state to liabilities whose magnitude had not been estimated.
- European Central Bank opposition prevented Ireland from imposing losses on senior bank bondholders, which transferred bank losses to taxpayers.
- Irish fiscal policy during the boom relied on transaction taxes from property, which disappeared exactly when spending commitments matured.
- The authors argue that Ireland's problem was banking supervision and fiscal composition rather than the euro as such.
Who should read it
Investors and analysts who want the rigorous economic account of the Irish boom and bust, including the programme negotiation from an insider's perspective.
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