Thursday, April 24, 2014
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Ireland’s Model Crisis

DUBLIN – Ireland has now left the clutches of the bailout-for-austerity framework established by the Troika (the European Commission, the European Central Bank, and the International Monetary Fund) for indebted eurozone countries, and is leading the monetary union’s economic recovery. European policymakers, including Jean-Claude Trichet, the ECB’s former president, have suggested that Ireland’s dogged commitment to austerity is a model for others.

Really? It was not long ago that Ireland’s economic miracle was also seen as a model – what the Economist in 1997 hailed as “Europe’s shining light” – attracting admirers as diverse and distant as China and Israel. Then, Ireland became a model for how not to manage a property bubble and, subsequently, a banking crisis. Although exiting the Troika program is undoubtedly a success, especially when compared with the country’s wretched outlook in late 2010, no one should aspire to what Ireland has been through.

Most Irish citizens would also reject the notion that their country has been austerity’s model patient. The fact that the country has again become fashionable reflects the confusion in eurozone policymakers’ economic thinking and the folly of imitation across think tanks and international institutions. A bona fide socioeconomic model should be built around an ingrained “way of doing things” – indeed, so ingrained that the model, like the vaunted Nordic one, is almost impossible to replicate elsewhere.

Ireland’s “way of doing things” has hardly changed, despite the crisis. Political and institutional reform has not matched changes in people’s lifestyles; accountability in public life continues to be frustratingly weak.

Nonetheless, some lessons can be drawn from Ireland’s recent experience. Unlike the European Union’s other periphery countries, Ireland established a political consensus around the need for austerity, and repeated this message continuously, at home and abroad. Like Chile during Latin America’s period of financial volatility, Ireland’s crisis management was generally good, and high-quality outward-facing institutions, (such as the Industrial Development Authority and the National Treasury Management Agency) presented a consistent and positive image to the world.

But Ireland needs to do more. In particular, it needs to focus on how the banking crisis has affected the economy’s long-term growth potential, on how the nature and structure of the banking system needs to be changed, on local businesses’ ability to adapt in a credit crunch, and on the mounting social costs of austerity.

The political lesson Ireland’s leaders have taken from the bailout experience is that loyalty to the status quo, rather than a combination of truth-seeking and radical action, is the best way forward.

This, however, takes us only so far – and is potentially dangerous is the long run. While resoluteness can be commendable, a “head-down, maul forward” policy, to use rugby parlance, brings other risks. First, although Europe might be able to scrape through the current crisis on austerity alone, it would be left ill-equipped to address deeper structural shortcomings, to say nothing of making progress on fiscal, banking, and political union.

Moreover, there is a risk that some will conflate the view that “loyalty works” with the idea that “austerity” works. And it is too early to say that. How, for example, can we disentangle the impact of austerity from that of the colossal spending undertaken by ECB President Mario Draghi? Will we be able to claim that austerity was a success if, for example, a large eurozone economy like France fails to grow?

The second concern relates to the issue of risk-taking itself. A low-risk approach may have helped pull Ireland through the Troika program. But would it also galvanize the country sufficiently to reshape its banking industry, restore a failing health-care system, or repair the social damage wrought in towns across Ireland? In business, risk-taking – and its close relation, innovation – cannot be imported. Some things must be homegrown.

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  1. CommentedStamatis Kavvadias

    This "follow the status quo" doctrine is completely unjustified. A developed country, managing not to default with large cost, does not justify, of course, such a conclusion. Trying to establish such doctrines on subjective interpretation of the facts, without any quantitative references, is obviously the regressive thinking of the status quo, of which this article is a proud representative.

  2. CommentedMatt Stillerman

    "...Ireland established a political consensus around the need for austerity..." Really? The Irish government fell over this very issue. Please get your facts straight.

    The real shame was that Ireland agreed to bail out its banks AND to make whole ALL of their creditors. This was just crazy, and was wildly unpopular. If they had not done so, then banks in, among other places, Germany would have taken a very well-deserved haircut. And, the Irish state would have been in fine shape, financially -- would not have needed any external help.

    Of course, Germany would have had to bail out its own banks which which had made very unwise investments -- revealing the "strength" of the German economy as the fiction that it surely is.

  3. CommentedJose araujo

    "The political lesson to be learned from Ireland’s experience is that loyalty to the status quo, rather than a combination of truth-seeking and radical action, is the best way forward. But this takes us only so far".

    Yes, just take a look at what island acomplished with radical actions and defying status-quo and compare it to Ireland or Portugal.

    No doubt that complying with the status-quo isthe way to go, fomenting immigration and losing a big part of the resources you invested in, etc

    Ireland miracle, is like saying a person that lost amputated a limb is a success in weight lost...

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