Representation in Ireland

The Economy

As a small open economy Ireland’s financial fortunes are dependent on international trade and influenced by global markets.

That means it’s important for the country to build overseas partnerships and being part of the European Union enables us to do just that in solidarity with other nations.

Before joining the EU in 1973, Ireland’s largely agricultural based economy was choked by its dependence on the UK market.

At that time, industrial trade and international co-operation were becoming the norm and EU membership helped Ireland move towards a modern, free market economy.

The EU’s Single Market environment, together with decisions to introduce low corporate taxes and develop an Industrial Development Agency (IDA Ireland) to promote Ireland abroad, eventually enabled the new Irish economy to flourish.

One of the difficulties with small open economies like Ireland’s is that they can be vulnerable to global factors and Ireland’s strongest period of economic growth, from the mid ‘90s to the mid ‘00s, was followed by a spectacular crash sparked off by a worldwide financial meltdown.

This led to the Irish Government requesting financial assistance from the European Commission, the European Central Bank and the International Monetary Fund (IMF), collectively called the troika.

After several difficult years, Ireland’s economy is now growing again and the European Union has introduced several new, powerful measures to better protect the economies of Ireland and all Member States in the future.

 

Economic and Monetary Union

The global economic crisis that hit Europe in 2007 exposed shortcomings in the EU’s financial systems and forced European leaders to refocus their efforts on creating an Economic and Monetary Union (EMU).

The crisis showed that while Europe had made significant progress on integrating EU economies the job wasn’t finished, and that’s why the EMU is now a top European Commission priority.

The aim is not just to protect the economies of Member States as a fully functioning EMU will ultimately create a better, fairer life for all citizens and prepare Europe for future global challenges.

The basis for delivering a deeper, fairer EMU is the Five Presidents’ Report that was prepared in 2015 at the request of Eurozone leaders.

The report calls for progress to be made on four fronts focused on creating economic, financial, fiscal and political unions in three stages.

Measures in the initial stage that are set to be in place by June 2017 include creating national competitiveness boards in Member States, completing the Banking Union and establishing a new advisory European Fiscal Board.

The first stage will also see the introduction of a European Deposit Insurance Scheme to better protect bank deposits while the second stage includes proposals for an accountable Eurozone treasury where beneficial joint decision making for Member States using the euro could take place.

Work has already begun on finalising the EMU and it’s hoped the final stage will be completed by 2025 at the latest.

 

The road forward

EU Member States, acting in solidarity with the European Central Bank and the European Commission, have agreed a number of measures aimed at protecting Europe from future economic turmoil.

The Commission proposed 28 new rules to better regulate, supervise and govern the financial sector so that in future taxpayers will not foot the bill when banks make mistakes.

Most of these rules are now either in force or in the process of being finalised.

Here are some of the important steps Europe has taken towards a more secure financial future:

There are 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 came into force in 2013 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 banks are better capitalised, behave responsibly and are able to lend money to households and businesses. This paves the way for the Banking Union that will make sure people’s deposits are protected and taxpayers don’t end up paying for the failure of banks.

Legislation has also been adopted to tackle excessive volatility in financial markets, including on hedge funds, short-selling strategies, credit rating agencies and ‘over-the-counter’ derivatives.

A ‘Backstop’ to protect the single currency has been introduced through the European Stability Mechanism (ESM) – a fund that will help Eurozone countries temporarily unable to borrow money on the financial markets. Loans will be provided to Eurozone Member States if they agree to reform their economies and restore their financial stability.

In December 2011 five new Regulations and one Directive came into force in the EU. Collectively called the ‘Six-Pack' they 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 a final agreement on behalf of Member States on new rules to stabilise Eurozone economies. Known as the ‘Two Pack' it 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.

The Irish Presidency also brokered agreement with the European Parliament on the single EU bank supervisor. Under the agreement the European Central Bank (ECB) was given supervisory powers over all major banks in the European Union through a Single Supervisory Mechanism (SSM).

This has been strengthened further by the Single Resolution Mechanism (SRM) that came into force in January 2016 to help cut ties between government finances and domestic banking sectors.

A yearly cycle of economic policy coordination called the European Semester is now in place. Every year, the Commission undertakes a detailed analysis of EU Member States' plans for budgetary, macroeconomic and structural reforms and provides them with country-specific recommendations for the next 12-18 months.

The Semester, introduced in 2010 and streamlined in 2015, takes place after the publication of the Commission’s Annual Growth Survey, which usually takes place in November.

 

Ireland's Economic Progress

The European Commission’s winter 2016 European Economic Forecast highlights Ireland’s recent economic recovery, but there won’t be any return to the days of unsustainable growth.

The new EU rules outlined above means growth will be better managed to prevent future financial difficulties turning into decade-long disasters.

Table showing the key figures for Ireland from the Winter 2016 Economic Forecasts
Table showing the key figures for Ireland from the Winter 2016 Economic Forecasts

According to the forecast Ireland’s record GDP growth in 2015 of just under 7% was broad-based and coupled with strong job creation.

Government finances also improved thanks to strong revenue growth offsetting increases in expenditure. However, while the government debt ratio is declining it remains very high and will need to be addressed.

The forecast predicts that GDP growth rates in 2016 and 2017 will be more sustainable at rates of about 4% and 3% respectively.

Ireland’s recent GDP growth started in the external sector but it’s now being driven by domestic demand, which expanded by more than 8% in the first nine months of 2015.

There’s good news on the jobs front in the forecast, with the unemployment rate down to 8.8% in December 2015 compared to 10.2% a year earlier.

It’s expected that unemployment will now decline more slowly and reach 7.8% by the end of 2017.

House prices and rents are forecast to grow at moderate rates, contained by the macro-prudential policies of the central bank and State plans to address supply shortages.

The risks to future Irish economic growth are balanced according to the Commission’s forecast. Ireland is particularly exposed to a possible deterioration in the global financial environment, which could dampen exports.

However, domestic demand could surprise on the upside if Government policies to boost construction are successful.

The forecast warns that Ireland’s economy remains vulnerable to shocks in interest rates and changes in the operations of multinationals.

 

Ireland's Economic Crisis

Ireland became a victim of the 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.

Irish banks had lent huge amounts, much of it to property developers, leaving our banking system exposed when funds could no longer be borrowed from the markets and the risks of non-repayment of the property loans made by the banks became suddenly larger. During the bubble, the balance sheets of Irish domestic banks had grown through property lending to four times Irish GDP, and the scale of the Irish banking crisis was correspondingly larger than in other countries.

As the crisis spread across other Eurozone 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 Eurozone Member States were shielded from the worst effects of the crisis.

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 Eurozone 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 bank 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.

The €85 billion financial assistance package negotiated by Ireland included financial commitments of €22.5 billion from the European Financial Stabilisation Mechanism (EFSM) and €17.7 billion from the European Financial Stability Facility (EFSF).

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 timeline

2007

Ireland’s property market reaches its peak.

2008

Ireland’s property bubble starts to collapse 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.

2009

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.

2010

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.

2011

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.

2012

Irish voters approve the European Union Fiscal Treaty by 60% at a referendum

2013

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.

2013

Ireland successfully exits the Troika’s three year programme on December 15th 2013.

2014

Ireland again returns to the long term borrowing markets with a €3.75bn sovereign bond and receives a Moody’s upgrade in January 2014.

2015

According to EU forecasts, Irish GDP growth for 2015 as a whole was 6.9%.

2016

The European Commission’s winter 2016 European Economic Forecast expects a moderation in Irish economic growth for 2016 and 2017 to more sustainable rates of about 4% and 3% respectively.

 

Useful links

Post-Programme Surveillance for Ireland
European Commission Economic and Financial Affairs
European Economy Explained
Department of Finance
Memo: The EU's Economic Governance Explained