THE SHAMROCK TSUNAMI
This time two years ago I was a Euro-Millionaire. Not a multi-millionaire, but, for someone who started out with nothing, it was an achievement. And, in Ireland there were thousands like me, ordinary people whose net worth was in excess of one million euro. It was, of course, all based on the prevailing price levels of property in Ireland. A fairly modest house, with a small plot, which would sell in a Chicago suburb for half a million dollars at most, was retailing in Dublin and other Irish cities for at least twice that. In the swankier suburbs houses were sold for much more.
The rest of the economy was in synch. The stock market had never been higher, there were jobs in abundance and 10% of the work force were “New Irish” – immigrants, mostly from Eastern Europe, who had come to Ireland to work. Ireland was riding high, with, on paper, on of the highest per capita incomes in the world. The Celtic Tiger was roaring. . We believed the rhetoric, our hubris knew no bounds. Like Icarus we flew higher and higher. The unique and temporary set of circumstances which had combined to create our prosperity was regarded as something immutable and that prosperity itself as our manifest destiny. Life was good. Irish people, on an unprecedented scale, were enjoying North American standards of living, with rising social benefits to boot. Our infrastructure, long the butt of visitors’ jokes, was being modernised The population had reached levels not seen for over a century and the demographics were promising, with the youngest population and the fewest old people in Western Europe.
True there were excesses. Those with money were not afraid to show it. In 2006 Ireland, apparently, had the highest per capita private ownership of helicopters in the world (who makes these calculations?); “EVERYONE owns a helicopter”, one multi – millionaire businessman remarked to me. Even among those who didn’t, purchases of Mercedes, Beamers and high-end SUVs were sufficiently common to make it appear the roads were choked with them. But the prosperity had trickled down , and spread out. Altogether, in the three years 2005-2007, 671,000 fresh automobiles were registered, one for every five people in the country aged fifteen and up . The purchase of holiday homes and investment properties in Ireland and in locations like Bulgaria, Turkey and elsewhere became commonplace, not just for the wealthy but for many others, cashing in on the equity in their houses.
But that was then and this is now. “All changed, changed utterly!“ I am still probably a dollar millionaire – just – chiefly because of the decline of the dollar against the euro and also assuming I could find someone willing to buy my house. House prices are down by 25%, at a very conservative estimate, and continuing to fall. $100,000 randomly invested in Irish shares two years ago would now be worth around $25,000, with bank shares having fallen even more spectacularly. Unemployment has soared by 80% in the last year to a record level of 327,861. The optimists hope for a figure of 400,000 by year’s end; the pessimists fear half a million or more. Many of the Eastern Europeans have returned home. The Celtic Tiger has collapsed, and the Irish economy is imploding . Dismay is giving way to panic as yesterday’s bad news is overtaken by today’s even worse developments.
The slide began with the building industry. At first it was classic economics: oversupply, unsold units, price cuts and then job cuts. The stock market faltered, then began to fall. Questions were raised about the health of the banks, particularly after the sub-prime crisis hit the US. More jobs went, at first domestic and then, as the crisis gathered pace, some of the large multinationals on which we prided ourselves began to “rationalise”, to downsize their Irish operations and to relocate in lower cost locations. Dell, the fulcrum for much of the economy around Limerick, is to move its manufacturing operation to Poland. The knock-on effects on its local suppliers have already begun. Other companies are expected to follow suit or to scale back.
An Irish icon, Waterford Glass, ceased operations at the end of January. Currency movements have priced our exports out of our largest market, Britain. Our competitiveness has been eroded, with labour and energy costs in particular too high. Negative equity and simple inability to pay mortgages through lost jobs has begun to stalk the middle classes. The Celtic Tiger has been swept away by the Shamrock Tsunami!.
How bad is it? How bad will it get? Yes there is a recession in the USA and elsewhere, which is going to require careful (and lucky) management to prevent it developing into something worse. But in Ireland the perception – at least as important as the reality – is that ours is worse. For if the USA has caught a cold, Ireland has caught pneumonia. A joke circulating in Dublin – indignantly rejected by the Government – is that the only differences between Ireland and Iceland (in the grip of an economic meltdown) are one letter and six months. The talk now is not of the recession of the 1980s but of the calamitous 1950s, when hope appeared to disappear and when many families, including my own, left the country.
There is very little room for manoeuvre. Tax revenues have collapsed. Government spending was expanded considerably in the Tiger years, financed largely by revenues from the building boom. This year the Government will have to borrow 20% of what it spends. This is unsustainable and a start has to be made by raising taxes or cutting spending or both. The problem is that the public is in denial about the extent of what needs to be done. There is a mood of public frustration and scapegoats are sought, whether the bankers, the public sector or the higher paid. Given that 38% of the workforce pay no income tax and that the top 20% pay 75% of all income tax, the scope for squeezing the rich seems limited on that front.
A levy is to be imposed on public sector workers, whose employment is guaranteed. This appears only the first step. Property taxes, hitherto a political no – no, and a strict means-testing of some benefits appears next, together with hikes in direct taxes, sooner rather than later. The problem is that, even if these prove sufficient to balance the books, there will be nothing with which to stimulate the economy. A lengthy period of adjustment and starkly lower living standards looms with nothing guaranteed.
There is no consensus on a solution. The government has tried unsuccessfully to achieve one, involving the main interest groups. More bad news in the coming months may concentrate minds or at least provoke an informed debate. The traditional safety valve of emigration seems not an option and the whole means and pace of recovery, when our comparative advantages have gone, is problematic. There is brave talk that, when the world economy begins an upturn, Ireland will be well poised and equipped to avail of it. Hopefully this will prove the case, but it is likely to be an Ireland much changed from the giddy heights of the recent past.
THE SHAMROCK TSUNAMI IAN 0903 I
THE SHAMROCK TSUNAMI