Correction to This Article
A Nov. 13 Business article incorrectly said Ireland was the first country in the industrialized world to fall into recession during the current economic crisis. Denmark entered recession before Ireland.

Celtic Tiger Chained By Europe

Washington Post Staff Writer
Thursday, November 13, 2008; Page D01

DUBLIN When Ireland entered the world's most ambitious economic alliance -- the European Union -- the Celtic Tiger roared to life. Membership in Europe's private club, along with the subsequent adoption of the euro, lured scores of multinational companies to this country and ushered in an unprecedented era of growth.

But as Ireland faces its worst recession in a quarter-century, the policies and institutions that bind the European Union now represent some of the country's biggest obstacles to recovery.

The global credit crunch has silenced the construction cranes that transformed Dublin from a sleepy backwater to a major financial center. Yet the Irish are finding they have fewer and fewer ways to get them started again.

In surrendering monetary policy to the European Central Bank and agreeing to meet specific budget targets, Ireland and other E.U. countries are now handicapped in their ability to craft responses to specific economic challenges. As a result, economists say, the recession in Europe is likely to be even deeper, and last longer, than the one in the United States, making it more difficult for the global economy to bounce back quickly.

"The structural problems in the United States are on an order of magnitude less than in Europe," said Constantin Gurdgiev, an economist and research director of NCB Stockbrokers in Dublin. "Ireland is now the litmus test for the European model -- a test of whether it will work or whether it won't."

Seeking solutions, European leaders will converge in Washington on Saturday for a global economic summit, pushing sweeping reforms of the world financial system. Pressing for everything from global guidelines on executive pay to universal accounting standards, they are calling on the United States and other major nations to sign on to their plan within 100 days.

Their urgency stems from the fast-deteriorating economic picture at home. While the United States is set to shrink by 1 percent in 2009, the 27 E.U. nations may contract by an average of 1.4 percent, according to Tom Mayer, chief economist for Deutsche Bank in London. The former dynamos of the region, including Ireland and Spain, appear likely to be hit hardest, with unemployment in Ireland already at an 11-year high and, analysts predict, likely to get much worse.

Before the global downturn, the country had emerged as a beacon for foreign companies -- particularly those in the United States -- eager to tap rich European consumers. Ireland benefited from being the only English-speaking nation in the euro zone. But it also greased the wheels of growth by offering companies lucrative incentives and among of the lowest corporate tax rates in the world. From 1995 to 2007, the Irish economy grew at a blistering average of 7.5 percent a year.

That growth was most visible on the Dublin riverfront, where a new breed of developers transformed this city of cozy pubs with a slew of new luxury condos, wine bars and grade-A office space. Fueled by low interest rates on euro loans and a flood of Eastern European immigrants who came to work in the sprouting restaurants and factories of Dublin, Cork and Shannon, house prices in some areas of Ireland jumped as much as 500 percent in a decade.

"The problem, you see, is that things got out of hand," said Mike Wallace, a developer who sports white rock-star hair and an earring. "The money was too cheap, and incentives to build too great. The effect was the opposite of European integration. We became more like America and less like Europe. That has got to change."

Today, Wallace has three prime parcels of land that he'd like to build on. Despite a national housing glut, the properties are in highly coveted areas, but most banks are refusing to lend. Banks that are willing to do so are charging interest rates -- once so low as to promote overbuilding -- that are too high to make any building project worthwhile. "We can't seem to get it just right," he said.

Part of the problem is that European monetary policy, which once worked in favor of fast growth in Ireland, is now working against it. Over the past decade, analysts say, European Central Bank interest rates were probably too low for the likes of Ireland, contributing to a massive credit bubble here that has all but collapsed in recent months.

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