The return of the Banana Republic of Ireland?

The Irish crisis looks like the sort of thing we are more used to associating with the Third World. A government going cap-in-hand to international moneymen amid fears that it may be unable to meet its obligations; a ‘secret’ run on the banks as overseas investors withdraw their billions; International Monetary Fund (IMF) and European Union (EU) officials going over the nation’s books, with talk of a possible ‘lockdown’ of the banks as the IMF did in Argentina in 2002; a severe austerity budget threatening yet more cuts in wages and benefits and tax rises; property prices in free fall and the economy slipping into deflation as the government’s support slumps even lower.

It seems understandable that all of this has revived talk of a return of the ‘Banana Republic of Ireland’ – only, as some wags point out, without the bananas. Yet it might make more sense today to turn those assumptions on their heads. This financial crisis looks less like a symptom of Ireland still being a Third World outpost in Europe, and more like an extreme version of the deep-seated problems now afflicting the UK and other economies of Western capitalism.

Until the credit crunch and the recession bit, it had become routine to hear the ‘Celtic Tiger’ lauded as a model for a modern enterprise economy, as the Republic of Ireland’s growth rates outstripped those of the UK and Europe, and everything in Ireland from house prices to tourism boomed.

The myth of the Celtic Tiger has now been cruelly exposed. Far from building a strong indigenous economy, Ireland artificially boosted its growth from a low base using a familiar combination of official subsidies (both from the state and the EU) and bank credit.

Its entry into the EU (then called the Common Market) alongside the UK in 1973 helped to transform the backward Irish economy. Huge subsidies paid for new construction and infrastructure, while low corporate taxes alongside easy access to the European market tempted foreign investors to set up assembly-kit factories. Ireland’s adoption of the Euro on 1 January 1999 marked its membership of Europe’s easy credit club. In the years that followed, the Republic enjoyed an unprecedented credit-fuelled boom, with consumer spending and house prices breaking all records.

The Republic’s apparently rapid progress has been brought to a shuddering halt with the global financial crisis, leaving an economy in ruins, symbolised by the half-built ghost housing estates littering the countryside. Yet if Ireland’s boom was not as exceptional as many claimed at the time, then neither is its bust really the exception today. It is only a more extreme version of the sort of problems experienced by capitalism elsewhere in Europe and the West. And as elsewhere, the popular focus on Ireland’s spendthrift banks as the source of all evil is disguising a deeper problem: the absence of a dynamic economy that all were happy to see covered up by the credit boom of the recent decade.

The state of the Irish economy certainly appears grim. The cabinet met in emergency session over the weekend to discuss accepting an international bailout whilst finishing off a four-year austerity budget that makes the UK’s spending cuts look soft by comparison. The Republic’s government deficit has now shot up to some 32 per cent of Irish GDP, which is not quite within the alleged Eurozone limit of just three per cent.

A large part of the recent increase in state debt results from the cost of propping up Ireland’s six big banks, which are in truly desperate straits. These banks lent billions in property loans that will never be repaid, funded with money from global investors. The Irish banks could not have kept up the repayments on these massive loans without the support pouring into their coffers – and straight out again – from the European Central Bank (ECB) and the Irish Central Bank. According to the BBC’s Newsnight, the ECB has already advanced more than €100 billion, equivalent in size to around two-thirds of the entire Irish economy.

Now, confidence in the Irish banking system has crumbled so far that big international investors have started a ‘secret’ – ie, largely unreported – run on the banks, withdrawing their funds. There are no Northern Rock-style queues of punters wanting their cash back as yet – after all, the Irish government has guaranteed all of their deposits. But the global moneymen are doing far more damage at the click of a computer button. According to reports in the Irish media, some €18 billion were withdrawn from Irish banks in September alone. Allied Irish Banks has admitted that €12 billion have been withdrawn since June – some 20 per cent of its entire deposit base. Bank of Ireland says it lost €10 billion in deposits in August and September. Left to their own devices, these banks would be bust. Now, fears are even being expressed that if these banks default despite all the bailouts, the government may have to make good on its guarantee of up to €440 billion in deposits – which could in turn leave the Republic ‘bankrupt’.

Yet while the figures are stunning, the underlying problems in Ireland are far from unique. Across the Eurozone, many states are running spending deficits well above the supposed three per cent limit; in 2009, when Ireland’s deficit stood at 14.3 per cent, Greece had an official deficit of 13.6 per cent, Spain 11.2 per cent and Portugal 9.4 per cent. The Eurozone average deficit, including the stronger economies, was running at 6.3 per cent of GDP. Outside the Euro, the UK deficit at that time was 11.5 per cent.

The explosion of credit to finance speculative bubbles as a substitute for addressing more structural economic problems was a common feature of all advanced capitalist nations through the decade of ‘boom’. As a consequence, we have witnessed desperate multi-billion bank bailouts everywhere, not least in the UK where much of the sector was effectively nationalised. Elsewhere, such as in Spain, the banks have maintained a fiction of liquidity by refusing to face the facts about the collapse of a property market that was as wildly over-inflated as Ireland’s.

Perhaps Ireland has become the most extreme case of financial meltdown because there were fewer cultural or regularity restraints on the credit explosion there. As relative newcomers to the world of easy credit and booming paper asset prices, the Irish threw themselves into the moment with the enthusiasm of fresh converts. Now they are faced with the bitter consequences. But the difference between them and the rest of the West is one of statistical scale, not substance.

Ireland certainly fits into the international pattern of trying to blame the banks and bankers for their problems. The Irish government has in particular pointed the finger at Anglo Irish, the failed (and now nationalised) real estate lender with €30 billion in unpaid loans. No doubt the Irish banks made absurd-looking loans on anything that stood in a field, and pocketed the profits. But this government blame-mongering misses the point. Bank credit and state spending were encouraged as the basis of the boom in the absence of anything more meaningful. You would be hard pressed to recall too many complaints in high places about booming house prices at the time. They provided the smokescreen to hide the hole where the dynamic productive economy ought to be. Now it is clear across the West that that particular emperor (or perhaps in Ireland’s case, colonial) has no clothes. This exposure has proved a problem for all, especially so in the Republic where the real economy remains so small in a country of around four million souls.

That Ireland is now an graphic manifestation of a far wider financial and economic crisis is clear in the way that the larger economies have rallied round and insisted it accepts more assistance. The IMF and the EU have not done this out of the goodness of their black hearts – indeed, as Brendan O’Neill shows on spiked, the price they are demanding by way of repayment amounts to the effective re-colonisation of Ireland (see The Republic of Ireland: colonised by commissioners, by Brendan O’Neill). No, their fear is that the repercussions of the Irish crisis will spread in the Eurozone, not because of some medical-sounding ‘contagion’, but because of the tangled interdependency of the financial system.

These fears extend beyond the Eurozone. During the credit boom years the risk-averse capitalists of the West sought to dodge responsibility for their debts and commitments by passing them on to one another via all manner of financial instruments, notably packages of sliced-and-diced dodgy mortgages. The upshot is that foreign banks now have an exposure to the Irish banking system that has been estimated at more than €100 billion, much of it owed to UK and German banks. Add in various other forms of debt, from government bonds to mortgages, and the British banks’ total exposure to Ireland was put at $222 billion by the Bank for International Settlements in March 2010 – a quarter of the entire world’s exposure to the Irish financial crisis. Little wonder that the British government has been so quick to promise big loans to Dublin, even in the midst of Westminster’s own crisis.

Though a bailout should be agreed this week, it remains uncertain how the Irish crisis will ultimately be resolved – especially as so much of what is happening remains secret, with some experts predicting an imminent banking collapse while others claim the problems have been exaggerated. Probably all that can be said with much certainty is that there will be another financial crisis along somewhere soon enough, so long as the response remains one of trying to maintain as much of the status quo as possible rather than looking for new solutions.

Meanwhile, alongside the bitter jokes about the return of the Banana Republic of Ireland, there is talk of a new Irish diaspora, with many young people leaving their homeland in search of work and a better life as their forefathers once did. But where would they go, in the changing world of twenty-first century capitalism? The UK offers few prospects now, and even America is not the economic promised land it once was. Unless we are going to see new Irish communities booming in China and India, they might be better off staying to sort out the future.

Mick Hume is spiked’s editor-at-large.