Breaking point for the eurozone?

Ireland’s ‘miracle’ economy has turned terrifyingly sour – and as it strains against the inflexibility of the euro, its next crisis may shake the entire EU.

Thousands of public sector workers protest on the streets of Dublin
Thousands of public sector workers protest on the streets of Dublin Photo: NIALL CARSON/PA

They can barely let the words pass their lips, but some of the EU’s most important policymakers were forced this week to discuss what was once unthinkable: that at least one of the 16 eurozone countries might be on the brink of ditching the single currency.

Jean-Claude Trichet, president of the European Central Bank, admitted that the 10-year-old eurozone was under “extreme strain”, with weaker countries struggling to keep their economies afloat in the face of the devaluation of other currencies, such as sterling and the dollar.

Joschka Fischer, Germany’s former foreign minister, darkly suggested that we would soon find out whether the eurozone would turn out to be “a disaster”, while the German finance ministry is vacillating on whether it would be prepared to bail out insolvent states.

The current thinking is that Germany and France, as the strongest economies in the zone and “lenders of last resort”, would have to bail out failing states: the prospect of the eurozone breaking up would bring the future of the EU into question.

But the most startling fact to emerge this week is that the country which is seen as the most vulnerable, and therefore the most likely to ditch the euro, is not Slovenia, or Cyprus, or Greece, but Ireland.

Until a year ago, the Republic’s Celtic Tiger economy, which attracted such blue-chip companies as Dell, Microsoft and Intel, seemed unstoppable. In a decade, the Irish economy grew by almost 90 per cent, catapulting it from one of the poorest countries in Europe to the fourth-richest per capita. Government advisers from as far afield as Chile and Israel made pilgrimages to marvel at a model that they were desperate to emulate.

Not any more. All of a sudden, Ireland’s debt-fuelled economy, built largely on a construction boom, has collapsed in a more spectacular manner than almost any other in Europe. Irish government bonds are rated as the riskiest in the EU (see graphic), and there has been panicky talk of Ireland as “the next Iceland”.

On the streets, there is a whiff of revolution, with 120,000 people staging Dublin’s biggest mass rally in 30 years last weekend to protest at the government’s handling of the economy and its decision to impose what amounted to a pay cut on public sector workers. The unions have now threatened a “Doomsday” strike next month if the prime minister, Brian Cowen, does not think again. As the celebrated Irish economist David McWilliams put it: “The entire Irish episode will be studied internationally in years to come as an example of how not to do things.”

So how did it all go so wrong?

Visiting Dublin this week, I took a stroll down the south bank of the River Liffey, to the site where Ireland’s tallest building, the U2 Tower, should by now have been rising out of the ground as the ultimate symbol of the Celtic Tiger’s “economic miracle”. Designed by Lord Foster, the
60-storey glass skyscraper was to have housed dozens of one-million euro apartments (£1 million), topped by a penthouse recording studio for Ireland’s most successful band.

Instead, there was nothing to see but dead grass, crushed beer cans and a rusting skip inhabited by 3ft weeds. Two months ago, the developers postponed the project indefinitely. This scruffy patch of former dockland represents the end of the dream for Ireland, whose “economic miracle” was largely based on a crazy construction bubble, fuelled by tax incentives, which, when it finally (and inevitably) burst, created a black hole that threatens to suck in the rest of the failing economy.

In 2006, Ireland (population 4.2 million) built 88,000 houses, compared with 150,000 in the UK (population 60 million). At one point, a fifth of the workforce, swelled by tens of thousands of immigrants, worked in construction.

Irish families on middle and even low incomes cashed in their pensions or borrowed heavily to buy second, third or even fourth properties, believing they could rent them out to the migrant workers who had caused net immigration for the first time in Ireland’s history. They could borrow from banks that enjoyed one of the loosest regulatory regimes in Europe, and which shipped in money from abroad to further stoke up the boom.

Ireland now has up to 350,000 empty homes – more than its entire private rental market – many of them simply abandoned as builders went bust. House prices are expected to fall by 80 per cent.

Ireland might have been able to withstand Europe’s most savage property collapse had not its export trade been shredded at the same by currency devaluation in its two key markets – Britain and America.

The relative rise in the value of the euro against sterling and the dollar has made Irish goods – and wages – prohibitively expensive. Businesses in the north of the Republic are on their knees because competitors in Northern Ireland are undercutting them by as much as half.

In an ominous sign of things to come, the computer firm Dell has announced 250 redundancies at its plant in Limerick, simultaneously confirming that it intends to create thousands of new jobs in Poland.

The slump in the Irish job market means that the country’s youth, who for years now have been able to find jobs at home, are once again having to look abroad for employment, so that the Republic may soon return to its traditional pattern of net outward migration. Already, large numbers of Irish workers are moving to Britain seeking work.

Crucially, the Irish government is powerless to act because, as a member of the eurozone, it has no control over interest rates or currency devaluation.

While the Bank of England could cut interest rates to one per cent and plans to devalue sterling with “quantitative easing”, the Irish have had to resort to desperate measures to reduce their budget deficit, such as the public sector wage cuts which led to the mass demonstrations.

Evidence of the effect on Ireland’s real economy, as unemployment heads towards 10 per cent, is everywhere.

In Dublin’s docklands, once expected to become a sort of European Dubai, row upon row of kitchen suppliers, interior design and furniture shops have closed since my last visit nine months ago, their windows covered in a thick layer of grime.

Catherine Claffey, whose family have sold flowers at the same pitch in Grafton Street, a few yards from Chanel and Louis Vuitton, for 85 years, told me business was down 60 per cent on last year.

“I’ve only been able to keep going because I’ve never taken out any big loans,” she said. “But I have friends earning very modest salaries in the public sector who have been told their wages are going to be cut by 500 euros a month. How are they going to survive?”

A hundred yards down the road, a group of taxi drivers was staging a noisy protest over the government’s failure to manage taxi numbers. Thousands of workers who have lost their jobs in other sectors have been allowed to set up as cabbies, meaning that Dublin now has 16,000 licensed taxis. New York, with a population 17 times as large, has 13,000.

Andy Doyle, a cabbie for 20 years, said: “There are so many taxis now that you can be waiting two-and-a-half hours on a rank before you pick up a fare. Yesterday I waited an hour and three quarters for a 6.20 euro fare. You just can’t live on that. But the government is happy to let it go on because it keeps the unemployment figures down. It’s madness.”

The resounding “No” vote in last year’s referendum on the European Constitution suggested that Ireland has finally fallen out of love with Europe. But will it now take the ultimate step and ditch the euro?

Sean Murphy, director of policy at the business organisation Chambers Ireland, believes not.

“Everything positive in the Irish economy for the past 30 years has been driven by our membership of the EU,” he said. “In the long term it will continue to benefit us. We have a small, flexible economy, which means we will be able to turn it round much quicker than a bigger economy like the UK’s.

“It’s become clear that we need a more balanced, diverse economy, with more jobs in things like alternative energy and information technology. I believe our EU membership can only help with that.”

But if the Irish economy, and that of other struggling EU states, continues to nosedive, the cohesion of the eurozone is likely to be tested to breaking point.

By Gordon Rayner
Last Updated: 7:14PM GMT 27 Feb 2009

Source: The Telegraph

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