Ireland began to lose its way following the bursting of the tech bubble in 2001. Rather than use that opportunity to move on to a different growth model, one more focused on its lagging domestic economy and homegrown companies, Ireland opted to double down on the old formula of foreign investment and government spending that had worked so well before.
To lure banks, insurance companies and accounting firms from New York and London to its Dublin financial services hub, officials offered special tax breaks and an explicit promise of “light touch” regulation.
Ireland's economy is showing signs of recovery.
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Tossing aside the fiscal restraints imposed after the ’80s financial crisis, the government embarked on a spending spree, stepping up investments in infrastructure and education, renewing tax breaks for real estate development and dramatically increasing the pay of government workers.
The Irish economy also got a boost from the European Central Bank, which kept interest rates artificially low to bolster the lagging economies on the continent even as Ireland was beginning to soar again. At the same time, British, French and German banks began tripping over one another to make loans to households, banks and property developers, as well as the Irish government.
All of these developments combined to create a giant credit bubble in Ireland that, in turn, fueled a real estate and construction boom. At its peak, this real estate frenzy probably accounted for 25 percent of the economy’s output and employment and generated a third of the government’s tax revenue. Households flush with paper wealth and borrowed cash went on a spending spree, as did a government suddenly flush with tax revenue. Wages and prices soared and a country that once boasted it was one of the cheapest places to do business suddenly was one of the most expensive.
Only when the credit bubble burst did Ireland discover how bloated and misshapen its economy had become, how much capital and talent had been misallocated and wasted, how unsustainably inflated its wages and prices and tax revenue had become. It also revealed that most of its biggest banks were insolvent. The cost of guaranteeing the obligations of Ireland’s privately owned banks brought the government itself to the brink. And the rescue loan from the European Union and the International Monetary Fund came with a demand that the government move quickly to bring its annual budget deficits to within 3 percent of the country’s GDP.
The financial crisis and the ensuing recession dealt a serious blow not only to Ireland’s balance sheet but also to its national pride. Many here are quick to blame it all on greedy bankers who caused the bubble and feckless politicians who approved the bank guarantee. But when collective anger — and there is plenty of it — gives way to more sober individual reflection, most people come around to the conclusion reached by John Allen, an economic development official from the west of Ireland, when he says: “We lost the run of ourselves.”
A global competitor
The most obvious thing to say about Ireland today is that it has two economies that maintain a somewhat separate and uneasy coexistence.