In the world beyond its emerald shores, meanwhile, another simple narrative about Ireland’s economy has found a receptive audience, this one about the Draconian spending cuts and tax increases that have been forced on Ireland by its creditors in order to reduce an annual government budget deficit that had reached 32 percent of the country’s annual economic output. The Irish themselves have long since accepted the urgent necessity of belt-tightening. But to Keynesian critics who believe in the healing power of fiscal stimulus, the country’s recent slide back into recession is offered as proof of the futility of austerity.
Neither of these fables — the one about the bank bailout, the other about austerity — is adequate to explain the rise and fall of the Celtic Tiger. You don’t have to spend much time here before discovering that the real story turns out to be both more complicated and more interesting.
In fact, you might say that what’s holding back Ireland’s economy is the same thing that is now holding back the once-fast growing economies of Brazil, Russia, India and China. It is the same thing that afflicts Greece, Italy, France and the other struggling economies of Europe. And, to a somewhat lesser degree, it is the same problem bedeviling the U.S. economy.
In each, it is the inability to make fundamental reforms to political and economic institutions that now prevents them from rebalancing their economy, from taking next leap in terms of their productivity and efficiency, from creating a new, more sustainable model for economic growth.
The global credit bubble created the illusion that countries could continue growing their economies without making the fundamental reforms to institutions crafted for an earlier era. The bursting of that bubble has revealed the full extent of that political and economic mirage.
“We need to talk not about recovering the economy but recasting it, since in some important ways, what we had before was a disaster,” says Jim Browne, the president of the National University of Ireland at Galway.
Cycles of busts and booms
The story of the Celtic Tiger begins with a small and once-poor island nation that, following an earlier financial crisis in the 1980s, was masterful in using targeted incentives, a low corporate tax rate and a heavily subsidized entry into the European Union to lure multinational corporations to open factories and back-offices in Ireland. In the span of 15 years, a country whose chief exports had been beef and butter suddenly turned itself into a modern, industrial economy that boasted the highest output per person in Europe.