This year is the 10th anniversary of the start of the crash in Ireland. Doesn't time fly when you're having fun coping with austerity?
When it comes to weather, the Irish are a nation of snowflakes. The cold and windy spells that hit the country several times over the Christmas period and returned over the past week prompted the usual dire warnings in the media here.
A high point of this alarmist stuff was one TV weather forecast last week predicting as much as two centimeters (three quarters of an inch) of snow the next day. Yes, a whole two centimeters! And we were warned to be ready because it might be even worse! As it turned out, once again there was nothing to worry about. Like all the other snow and storm warnings we got over Christmas and since then, it wasn't a problem.
Even in the cold, windy spells we had during the holiday and new year period, the temperature rarely dropped more than two or three degrees below freezing, usually at night. There was little more than a light dusting of snow in most places. Which begs the following question: What would we be like if we were hit with an Arctic weather bomb producing temperatures 20 degrees below and a foot or two of snow like the storms that hit the east coast of the U.S. last week?
Anyway, while you were all wrapping up in multiple layers and trudging through the freezing snow, people here had forgotten all about our "cold spell." Instead last weekend people here were remembering a storm of a different kind, the financial storm that descended on Ireland in 2008 and lasted for years.
Tenth anniversary of Ireland's crash
This year is the 10th anniversary of the start of the crash in Ireland. Doesn't time fly when you're having fun coping with austerity? Looking back now two things are striking. The first is how completely and quickly we collapsed after the boom ended, to the point where the country was virtually bankrupt.
The second is how successfully we have managed to recover just 10 years after the crash, to the point where we now have almost full employment and are again the fastest growing economy in Europe (five percent last year), as we have been for the past three years. The speed of this recovery has been remarkable and is something to be proud of. But it is also a cause for some concern since we are now starting to exhibit some of the same signs that got us into trouble before, like our rapidly rising house prices and rents.
We seem to be addicted to boom and bust, rather than the modest but sustainable growth they do in Germany, for example. We couldn't do boom and bust a second time, could we?
The Irish and property
House prices here, which had soared in the boom decade up to 2007, then began to flatline that year before going into rapid reverse. I remember back then a worried work colleague telling me he had bought two investment properties at top prices the year before which were quickly falling in value. Keeping up repayments was a problem, with rents declining as people lost jobs. He eventually lost both houses and was left heavily in debt to the bank, still on his modest journalist's salary. Nor was that the only story of woe I heard at the time.
In a taxi home from work one night the driver told me he had a new apartment in Sunny Beach which he had bought off the plans at a property fair in Dublin the year before. I didn't know where Sunny Beach was and he didn't seem to be sure either (it's a resort on the Black Sea coast in Bulgaria). He said the apartment was still unfinished and he was worried because the local developer was having problems. Meanwhile, he was working around the clock to make the repayments on his loan. I've no idea if his apartment was ever finished, but I do know a lot of such developments in Bulgaria turned into black holes.
We're not at that level of property madness here this time because the property buying mania that gripped so many ordinary Irish people back then means that people now are much more cautious. Once bitten, etc. There is also another important difference. Back then the banks were throwing money at people; now it's extremely difficult to get a loan.
Even so, with house prices going up eight or 10 percent a year, people who survived the crash with money are being tempted by soaring rents to get back into the game again. It's one reason, as well as the chronic shortage of supply, why so many young people are being shut out of the property market here now.
Saving the banks
As the crash began in 2008, the Irish government first tried to minimize the situation, telling us it was a temporary liquidity problem, the Irish banks just needed some breathing space. The infamous state guarantee for the banks was introduced and the few billion we were told it would cost soon turned into tens of billions as the property bubble exploded.
Two years later in 2010, with the markets refusing to lend the Irish state any more, this brought the country to the edge of national bankruptcy and the result was the humiliation of a bailout from the IMF and the EU. What followed was the grim austerity program imposed by the IMF-EU bailout team which arrived in Dublin to impose some discipline. State spending was slashed in many areas, including health and social housing, the two areas that are now causing problems. Basic welfare payments were protected but the impact of the austerity program was felt right across the economy. Unemployment topped 15 percent, pay for state workers was cut and a recruitment ban was implemented.
In the private sector, the crash cost thousands of jobs as firms went under. Emigration was back again. While all this was going on, taxes went up and new levies were imposed as we struggled to get the state finances under control. Making it worse was the ruling by our EU masters that the cost of the €67 billion bailout had to be borne by the Irish taxpayers rather than the foreign banks and bondholders who had poured money in here to get a slice of the Irish property boom. That is why, despite the recovery, the country is still so heavily indebted and will be for decades to come. This was outrageous (the EU has since changed its policy so that no other country will be treated like this in the future) but we were powerless to do anything about it at the time.
In fairness, it should be remembered that more than half of the financial black hole we were in was due to overspending by the state financed by tax revenue from the property bubble. But the rest was due to us having to pay back in full the international banks which had gambled foolishly on property in Ireland and lost. The five years after the crash were grim and the recovery took time to get going. But it took off over the past five years as exports from the big multinationals based here -- in IT, pharmaceuticals, etc. -- soared.
Leaner and meaner?
The crash had made us leaner and more competitive and we are still benefiting from that. The forecast for the next year or two is for this strong growth to continue, although Brexit has now made the future very uncertain. Added to this uncertainty is our re-emerging inability to keep state spending under control. State workers, for example, have already got almost all the pay they lost after the crash restored again, with excessive increases being granted in some areas like the gardai and public transport.
State pay in Ireland (for teachers, for example) is way ahead of that in other EU countries, even wealthy countries like Germany. Welfare payments are much more generous here than in the U.K., for example. There is nothing wrong with this, of course, if we can afford it. We have managed to get our budget back in balance, or at least close to it.
But pressure is building for extra state spending on a large scale as the public perception grows that we can now reward ourselves for the years of austerity. The old expectation that the state can pay for everything remains strong. High state spending during the last boom was paid for by tax revenue from the property boom. This time it will be based on the revenue from corporation tax, mostly from the big multinational companies here, which has soared in the past few years.
The problem is that this is almost as unreliable as property revenue and could shrink in the future because of the Trump tax plans and the Brexit fallout. Once given, extra state spending on pay, welfare etc., is very painful to reverse when revenue collapses, as we saw the last time. And it's not just the state sector that is coming under pressure to let rip. As full employment approaches, workers in some sectors in the private sector are also squaring up for pay increases as a matter of course rather than as a reward for extra productivity. In both parts of the economy, it was this sense of entitlement -- the old belief in money for nothing -- that got us into such trouble ten years ago. The property market -- the sector that caused the crash back then -- is already showing signs of previous bad habits.
The €2,000 a week blocklayer is back, that's if you can get him. House prices are soaring again and there's no end in sight. At present this is being driven by lack of construction, and the hope is that the market will calm down when supply improves. But that is not going to happen any time soon with the shortage of building workers and the difficulty developers have in getting finance. In the meantime, house prices will continue to spiral for several years. All this right now is making it look very much like the beginning of the last boom here. We know how that ended and we don't want to go there again.
It's probably unlikely to happen a second time. But we will avoid another boom and bust only if we are sensible. And it's going to be a tricky task for the government to get that message across in the coming year.