Two years ago, Mick Doherty was tooling around Dublin in a brand new, cherry-red Audi A4. “A six-speed,” the young Irishman adds, with a rueful smile. Today, Doherty drives around his adopted Vancouver in a 1990 Chrysler Daytona—automatic transmission. “And I’m grateful for it,” declares the 32-year-old construction worker who, last year, emigrated to Canada to escape a crushing recession that’s brought his native Ireland to its knees. It’s shrunk the economy by a tenth—the textbook definition of a depression.
What a difference a few years can make. As recently as 2006, the roaring Celtic Tiger was held up as a model economy. Doherty was making money hand over fist, holidaying three times a year, in Bulgaria, Las Vegas, Spain. Ireland famously boasted more BMWs per capita than Germany, and its lawyers and managers were earning bigger bucks than their counterparts in the U.S. But in late September 2008, Irish banks, overexposed to the property market, came under severe pressure as the credit crunch bit in. “More or less overnight,” says Doherty, “everything came crashing to a halt.” Ireland led Europe into recession.
Within weeks, his boss had laid off all but seven of 140 carpenters, Doherty included. He spent a year on the dole before leaving for Vancouver. He was joined, in June, by his girlfriend Lisa O’Hagan, 21, and her friend Steven Gormley, 23, both teachers, newly graduated from university. With a freeze on new teaching hires in Ireland’s schools—part of austerity measures brought in to tackle the gaping budget hole—there were no prospects for the foreseeable future, O’Hagan explains. Asked how many among their 10 closest friends had found work since graduation, neither could name a single person. Finding work now takes “years,” Gormley adds. “You sit around and wait, or you leave.” With unemployment topping 14 per cent, and the most brutal budget in the country’s history set to be unveiled next month, many are doing just that. In the next year alone, 120,000 Irish are expected to emigrate.
There’s no end in sight to the country’s woes. Debt continues to pile up, as Ireland is forced to keep shovelling money at its zombie banks. With a deficit set to reach a mind-boggling 32 per cent of gross domestic product this year, the erstwhile tiger could soon join Greece at the centre stage of Europe’s debt crisis. Many economists are predicting a lost decade is in the offing.
Such talk was unimaginable even three years ago, when Ireland was still booming, and foreign investment was pouring in, eager to take advantage of Ireland’s rock-bottom corporate tax rates, highly-educated, English-speaking workforce, and easy access to European markets. Many of the world’s biggest names in computing and pharmaceuticals set up shop: Microsoft, Apple, Intel, Pfizer. By 2000, Ireland had become the world’s leading software maker, and was boasting nine per cent annual growth, higher than any other developed country. The country was transformed. The Irish, in what economist David McWilliams dubbed the “Wonderbra effect,” were squeezed into the middle, and lifted—the developed world’s most significant social compression of the past half-century. “It’s not so much that the rich got richer,” he says. “Everybody got richer.”
But lurking beneath was what will soon be seen as the biggest property bubble in modern history, says Pete Lunn, an economist with Dublin’s Economic and Social Research Institute. Irish banks had gone on overseas “borrowing sprees,” and were handing out no-money-down mortgages hand over fist, says Brian Lucey, who teaches finance at Trinity College School of Business. The economy was swept up in a construction frenzy. The sector employed one in four Irish men.
Tax breaks on housing and development poured fuel onto the fire. And the country’s inclusion into the euro robbed government of the ability to raise interest rates to dampen the white-hot economy. By 2004, the International Monetary Fund and the Organisation for Economic Co-operation and Development (OECD) had begun flashing warning lights—which grew increasingly “redder, and flashier,” with each passing year, says Lucey. By 2007, the height of lunacy, Ireland’s household debt was at 191 per cent of household income (by way of comparison, it hit 130 per cent in the U.S. that year). A family home in Dublin cost as much as in Beverly Hills. Mortgages worth 10 times average earnings were commonplace.
By then, Ireland’s banks held frightening amounts of debt, none more than Anglo Irish, currently Ireland’s sickest bank. Between 1998 and 2008, Anglo’s loan book rose from $4 billion to $103 billion: half the country’s GDP. The global credit crunch shook the country’s banking sector, which had lent, usually without collateral, an amount equal to two-thirds of gross national product to property developers, Dublin economist Morgan Kelly has noted. Bank share prices began falling in March 2007, coming to a head by the next fall. Dublin would later nationalize Anglo, and try to rescue its rivals through the establishment of a “bad bank”: the state-run National Asset Management Agency (NAMA), taking the banks’ most toxic assets off their balance sheets. Already, Dublin has committed to spending $100 billion—10 times per head the amount the U.S. spent rescuing its banks, says Kelly. The banks, however, remain “extremely” ill, and in need of further help, Lucey notes.
The Irish, who have seen housing prices drop by 50 per cent, have shouldered austerity measures with typical stoicism, yet deeply worrying signals abound. One in three Irish under 30 are out of work. Last year, the suicide rate jumped by 40 per cent. The “Troubles” are thought to be returning to Northern Ireland, where the number of unemployed has risen by 146 per cent in the past three years: in 2009, the number of gun attacks by dissident terrorists shot up by 54 per cent in the British province.
Next month, Ireland’s Finance Minister Brian Lenihan will for the first time table a four-year budget. It’s going to be “horrendous,” says Lucey—“it has to be,” he adds. It is a critical moment. Ireland is the next-riskiest borrower in Europe, after Greece. In order to convince investors it can emerge from the mess, the government will have to take the chainsaw to the public rolls once again. (Salaries for nurses, professors and other public sector workers have already been cut by 20 per cent, says Lunn. His own salary is down 15 per cent.) The hope is that, by coming up with a credible fiscal plan, the country can cap concerns that it’s on the verge of a Greek-style debt crisis.
This fall, both the IMF and European Union have been forced to deny reports that Ireland will be bailed out with aid money. But the option, says Lucey, is “no longer by any means unthinkable.” Investor anxiety has increased in step with the growing tab for the banks’ bailout. Since spring, the final tally has been repeatedly upwardly revised, as hidden debts continue to emerge. Any further spooking of the bond markets will send Dublin begging, Lunn figures. At stake, he admits, is severe reputational damage. While Greece is one of Europe’s most closed economies, the export-dependent Irish economy is among its most open. “But what price reputation?” Lunn asks, apparently resigned to the possibility. “Reputation,” he adds, “doesn’t put food on the table or cheques in the post for public services.”