By Donal Donovan and Antoin E. Murphy
Traditionally the Irish, who can sing the dead to sleep, have been good at organising wakes. The financial wake of 2008 is another matter. It will be known as the year that initiated the great Irish financial crisis, just as 1847 has gone down as “Black 47,” the year when the Great Irish Famine peaked. “Black 47” involved a massive loss of population and a debilitating legacy of emigration. While not as catastrophic in human terms, “Black 2008” caused extensive damage to a sizeable part of Ireland’s economic fabric and had major repercussions for all parts of society. The scale of the economic and financial catastrophe that befell Ireland was virtually unprecedented in post-war industrial country history.
Ireland experienced four interrelated crises: a property crisis, a banking crisis, a fiscal crisis, and a financial crisis. Several key questions continue to be highly controversial. First, exactly who or what was “to blame” for what happened? While the international dimensions (the prevailing philosophy of light financial regulation, the inadequacy of the EU, and euro area architecture) were important, major responsibility lay at the domestic level. Very many were happy to benefit greatly from the artificial riches of the boom (especially public sector employees whose salaries soared as well as those involved in finance and construction). There were the “cheerleaders” (politicians of all parties and most of the media) and the “experts” (the Financial Regulator, the Central Bank, the Department of Finance, and much of the economist profession), none of whom shouted “stop.” All share responsibility, in different ways, for the fact that collectively Irish society “lost the run of itself.”
Second, once the financial crisis began to emerge in 2008, could anything have been done differently to reduce the massive costs to the taxpayer or to avert the indignity of the bail out from the EU/International Monetary Fund (IMF) troika in late 2010? This appears very doubtful. Given the paramount need to avert the collapse of the banks (with potentially catastrophic consequences), it is difficult to see how some form of comprehensive bank guarantee along the lines granted by the Irish government in late 2008 could have been avoided. At the same time, given the soaring underlying budgetary deficit, subsequent intervention by the EU/IMF became inevitable.
There is, however, a third very important question. Ireland has faced two financial crises in the last twenty five years. What conclusions can be drawn about the inadequacies of the Irish policymaking process? In the first place, there is a clear need to pay more attention to learning from elsewhere. Although Ireland’s property bubble was similar to that experienced by many other countries, many erroneously came to believe that this time was somehow “different.” History, including economic history and the history of economic thought, is still of paramount importance to avoid the excesses of those who think that the present is unique and the past of little relevance.
The absence of sufficient self-questioning and internal debate lies at the heart of the run up to the Irish crisis. Each component of the economic policymaking apparatus took solace from the belief that others must be doing a good job and from the praise lavished by official international agencies, most of whose judgments turned out to have been spectacularly wrong.
Any small economy on the periphery needs to guard against insular thinking by ensuring that key decision makers bring to the table sufficient technical expertise and exposure to today’s sophisticated environment. In Ireland’s case these elements were clearly lacking. There was also a noticeable tendency among senior officials to dismiss “contrarian” views while the boom was in full force. Those few who did raise unpleasant issues encountered considerable opprobrium — including from much of the media, lobby groups, and senior politicians. A “comfortable consensus” stifled serious analysis and the preparation of contingency plans to deal with perceived low probability, but high cost outcomes. Moreover, officials appeared reluctant to place their views explicitly on the record in advance of the emergence of a “consensus,” thus hindering the accountability that is critical for good governance.
It could be argued that some of these tendencies are inevitable in a small country like Ireland where sharp disagreements could cause friction to long standing personal relationships. However, the record of other similar countries does not suggest that this is inevitable. Ireland might not witness for a long time another property bubble, reckless lending by the banks, or a return to fiscal profligacy. But another crisis in the future — from whatever currently unknown source — cannot be excluded. A wide ranging systematic reflection on what is required for Ireland to establish a fundamentally sound policy making process is therefore essential.
Donal Donovan is a former deputy director at the IMF and a member of the Irish Fiscal Advisory Council. Antoin E. Murphy is a Professor Emeritus of Economics at Trinity College Dublin. Their book The Fall of the Celtic Tiger: Ireland and the Euro Debt Crisis was published by Oxford University Press in June 2013.
Image credit: Dublin, Ireland – August 19, 2012: A series of rent/sales signs on several buildings in one of Dublin’s busiest streets show the remaints of the financial crisis in the country. © MichaelJay via iStockphoto.