In simple terms, Ireland went from being held up as a shining example of how a small, open economy could become successful in the modern, global marketplace to being a country on the brink of financial collapse.
Ireland is now beginning to recover and measures are being put in place to encourage growth and protect our economy for the future.
A modest pick-up in economic growth is expected in 2014 and the labour market is continuing to show welcome signs of improvement, with the IMF predicting unemployment to fall to 10.5% in 2015 from a high of 14.7% in 2012.
However, Ireland needs to act in solidarity with other Eurozone Members to continue down the road to recovery and steps are being taken to ensure our economy is better protected in the future.
However, Ireland needs to act in solidarity with other Eurozone Members. Just as membership of the European Union facilitated our move from an agricultural based economy to a modern one driven by hi-tech industry and global exports, it’s now providing a route back to financial stability.
The financial problems that began to emerge in Ireland around 2007 were not all of its own making. The country was a victim of a global economic downturn that climaxed following the 2008 collapse of Lehman Brothers - the fourth largest investment bank in US.
Banks all around the world stopped lending to each other and credit dried up. Ireland was particularly vulnerable to the crisis because of a property bubble that had been inflating at an alarming rate for almost a decade.
Historically low interest rates fuelled unprecedented borrowing and Irish banks lent huge amounts, much of it to property developers, leaving Ireland’s banking system exposed when funds could no longer be borrowed from their international counterparts.
As the crisis spread across other Euro Area Member States, governments came to the rescue of their banks with urgent support on an unprecedented scale. A massive €4.5 trillion – the equivalent of 37% of the EU’s entire annual GDP – was committed between 2008 and 2011 to protect banks from collapse. This prevented a run on the banks and protected the savings of ordinary citizens. It also helped the euro currency maintain its value so Euro Area Member States were shielded from the worst effects of the crisis as EU companies still had a stable playing field for international trade and investment.
However, there was a price to pay for this strategy as the money used to protect the banks had to be borrowed and by late 2009 the most exposed Euro Area Member States, including Ireland, began to have problems servicing the debt.
Europe now had a sovereign financial crisis and banks reduced their lending to businesses and private households, leading to unemployment and hardship.
In Ireland the sovereign debt was compounded by a blanket guarantee given by the State to alleviate fears of mass deposit withdrawals and collapse. In addition, the Irish State had become heavily dependent on property taxes, which had disappeared with the bursting of the property bubble.
The increasing deficits and spiralling debt meant the financial markets lost confidence in the country’s ability to pay back what was owed, making it difficult for the State to borrow money at sustainable rates.
The strain finally became too much in 2010 and in November of that year the Irish Government officially requested international financial assistance, a move backed by the ECB and the European Commission.
A further €22.5 billion came from the International Monetary Fund while the UK, Sweden and Denmark added a combined €5 billion in bilateral loans to the package. The fund was completed with €12.5 billion from the National Pension Reserve Fund and €5 billion from Irish cash reserves.
Ireland’s property market reaches its peak.
Ireland’s property bubble starts to deflate as the country officially enters recession; the first Euro Area Member State to do so. Unemployment starts to rise sharply. Inter-bank lending collapses. The Irish Government acts to protect the country’s banking system and guarantees all deposits to try and prevent a run on Irish banks.
Unemployment reaches its highest levels since records began. Protestors take to the streets and the Irish Stock Exchange hits a 14 year low. The Government injects billions of euro into Irish banks to prevent them from collapsing. The National Asset Management Agency (NAMA) is established and takes on the role of banker for bad property debt.
The crisis deepens as more money is pumped into the ailing banks and the Irish Government officially requests financial assistance from the EU, the IFM and other Member States. A package worth €85 billion is negotiated, conditional on Ireland allowing its budget to be closely monitored by the Troika (European Commission, European Central Bank and the IMF) on a regular basis to ensure financial conditions are met.
The Irish Government is heavily defeated in a general election held just three months after the package is agreed. Ireland’s debt rating is downgraded to junk status.
Irish voters approve the European Union Fiscal Treaty by 60% at a referendum
Ireland successfully raises €5bn by issuing a syndicated 10-year benchmark bond to the financial markets. It’s Ireland’s first sale of benchmark bonds since the banking collapse in 2010.
Ireland successfully exits the Troika’s three year programme on December 15th 2013.
Ireland again returns to the long term borrowing markets with a €3.75bn sovereign bond and receives a Moody’s upgrade in January 2014.
The financial crisis forced European leaders to refocus their efforts on fiscal union.
It became clear that Europe needed to build a closer economic union to complement its existing monetary union, and to ensure that public finances remained sustainable.
The euro came under huge pressure and a lot of criticism during the height of the crisis but the currency held strong and broadly maintained its value.
Being in the Euro Area also meant struggling Member States could count on the solidarity of other members. Euro Area economies are interdependent, and just as everybody benefits if one prospers, everybody also struggles if one falters so it’s in the common interest of all to act together.
However, there was resentment over the fact that some Euro Area countries allowed excessive public and private debt to build up and failed to keep their finances under control, while others had been more prudent and managed their economies better before the crisis emerged.
The big lesson from the financial crisis is that Europe needs a more coordinated approach to fiscal matters. Restoring economic growth is no easy task, but measures have been adopted to ensure the European Union emerges from the crisis stronger than ever before.
The road forward
The European Commission’s Europe 2020 strategy sets out a realistic path for Europe's economic and social future. It’s designed to transform the EU into a smart, sustainable and inclusive economy delivering high levels of employment, productivity and social cohesion.
To keep Europe 2020 on track following the economic crisis the EU Member States, acting in solidarity, have agreed measures to restore financial stability and ensure Europe is protected from future economic turmoil.
Some measures are already in place while others are in the pipeline and when finalised they will ensure both Ireland and Europe will be in a better position to weather financial storms.
The EU has introduced new stronger rules on economic governance to keep a tighter check on public debt and deficits to make sure countries don’t spend beyond their means. A new fiscal treaty was also signed in 2012 to further strengthen confidence by limiting yearly structural deficits to 0.5% of GDP. The crisis showed that a debt fuelled economy, like Ireland’s was, is not sustainable. Under the treaty, the European Commission will now make sure that limits on debt and deficits are applied and that national budgets do not put other European economies at risk. This is the purpose of a fiscal union.
European financial supervision is being stepped up to make sure that banks are better capitalised, behave responsibly and are able to lend money to households and businesses. This paves the way for a banking union, to make sure that people’s deposits are protected and taxpayers are not forced to pay for the failure of banks.
A "Backstop" to protect the single currency has been introduced through the European Stability Mechanism (ESM) – a fund that will help Eurozone countries that are temporarily unable to borrow money on the financial markets. Loans will be provided if countries agree to reform their economies and restore their financial stability.
The EU will pursue the objectives of the Europe 2020 strategy, implementing structural reforms to tap Europe’s job potential, to boost productivity and competitiveness. This will be achieved through targeted investments, using EU and national funds to sustain cutting edge research, spread innovation and latest technologies, connecting up Europe’s transport and energy grids and bringing high speed internet to all Europeans, wherever they live.
5. In December 2011 five new Regulations and one Directive came into force in the EU. Collectively called the ‘Six-Pack' they are designed to strengthen the EU’s Stability and Growth Pact (SGP) – the framework of rules created to coordinate and safeguard national fiscal policies of Member States.
In March 2013 the Irish Presidency of the EU helped broker an agreement on behalf of Member States on new rules to stabilise Eurozone economies. Known as the ‘Two Pack ' the new rules will be put to the Council of the European Union and Parliament for approval before becoming law. The Two Pack consists of two regulations. The first monitors and assesses plans of countries with high, excessive government deficits while the second includes measures for countries experiencing severe financial difficulties, such as those emerging from an EU-IMF programme, like Ireland.
The Irish Presidency also brokered agreement with the European Parliament on the single EU bank supervisor. Under the agreement the European Central Bank (ECB) will be given supervisory powers over all banks in the European Union through a Single Supervisory Mechanism (SSM). This will be further strengthened by the Single Resolution Mechanism (SRM), which will help cut ties between government finances and domestic banking sectors. EU finance ministers are working with MEPs to get legislative agreement on the SRM that would see it enter into force on January 1, 2015. Further functions will then apply from January 1, 2016. The European Parliament voted on 15 April 2014 to accept the legislative agreement made with the Council, so a positive Council vote on the same agreement is the last required step.
Ireland's Economic Progress
Despite Ireland’s economic progress much still needs to be done to encourage growth and ensure long-term stability.
The economic goals now centre around three key objectives:
managing public finances, and
restructuring the banking and financial system.
It’s also important to stimulate domestic demand, stabilise the property market and maintain an economic strategy that supports job growth within a managed fiscal framework.
• Department of Finance projections published in February 2014.
The Irish Government’s multi-annual Action Plan for Jobs is designed to tackle domestic unemployment by mobilising all departments to work towards the objective of supporting job creation.
The first Action Plan was launched in February 2012 and according to Government figures more than 58,000 extra jobs were added in the year to September 2013.
More than 500 measures were implemented through the initiative during 2012 and 2013 and a further 385 actions are due to be taken by all 16 Government Departments and 46 State Agencies in 2014.
EU leaders, under Ireland’s Presidency, also prioritised the development of a co-ordinated and concerted response to the challenge of youth joblessness. This response is known as the Youth Guarantee. It is a guarantee, supported by central EU funding of €6 billion, that young unemployed EU citizens will be helped to find a job, work experience, training or further education.
Ireland is also working on re-adjusting public finances. We have a commitment to correct the deficit by 2015 through the corrective arm of the EU Stability and Growth Pact.
Like other EU Member States Ireland’s budgets will be monitored through the European Semester partnership that’s designed to prevent financial crises before they take root.