Representation in Ireland

The Economy

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

That means it’s important to build overseas partnerships and being part of the European Union enables Ireland to do just that in solidarity with other Member States.

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 such as the introduction of low corporate taxes and the development of 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 growing again and the European Union has introduced several new, powerful measures to better protect the economies of Ireland and all Member States from future financial shocks.

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Table from Eurobarometer report showing highest support for the Euro is in Ireland
Table from Eurobarometer report showing highest support for the Euro is in Ireland

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 growth and jobs as well as preparing 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 already taken include setting up national productivity boards to provide independent analysis of developments affecting competitiveness in Member States.

Progress has also been made on completing the Banking Union to ensure EU banks are stronger and better supervised and establishing a new advisory European Fiscal Board to strengthen the current economic governance framework

In December 2017, the Commission set out a roadmap for deepening the EMU, which sets out a path and timelines for the project.

The roadmap proposes the creation of a European Monetary Fund (EMF) built on the well-established structure of the European Stability Mechanism (ESM) to assist euro area Member States in financial distress and act as a last resort lender in times of crisis.

There’s also a proposal to incorporate into Union law the main elements of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (TSCG) to support sound fiscal frameworks at national level.

Other measures outlined in the roadmap are a communication on new budgetary instruments for a stable euro area within the Union framework and details on the possible functions of a future European Minister of Economy and Finance, who could serve as Vice-President of the Commission and chair the Eurogroup.

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Infographic on the EMU
Infographic on the EMU

The road forward

The European Commission’s roadmap for deepening the EMU is designed to enhance the unity, efficiency and democratic accountability of EMU by 2025.

By mid 2019 it aims to adopt all remaining proposals on Banking Union and make further progress on the Capital Markets Union to help mobilise capital in Europe for growth and job creation.

It’s a work in progress, but many important steps have already been taken towards a more secure financial future for Europe:

There are now 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.

The fiscal treaty that came into force in 2013 also strengthens confidence by limiting yearly structural deficits of Member States to 0.5% of GDP.

The crisis showed that a debt fuelled economy, like Ireland’s was, is not sustainable but the treaty will help ensure national budgets do not put other European economies at risk.

European financial supervision has been stepped up to make sure banks are better capitalised, behave responsibly and are able to lend money to households and businesses.

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), which 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 also 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 Autumn 2018 European Economic Forecast predicts Ireland to have the fastest economic growth in the EU in 2018. Ireland's GDP is expected to grow by 7.8% in 2018 which is well above the 2.2% forecast for the EU as a whole. Growth is expected to moderate slightly in 2019 but will still remain well above the EU average. Unemployment is expected to drop further and government deficit is projected to turn slowly into a surplus. The Ireland country report does point out that: "Ireland’s economic outlook is subject to significant uncertainties  related,  inter  alia,  to  changes  in  the international  taxation  and  trade  environment.  A  large  degree  of  unpredictability  remains  linked  to  the  activities  of  multinationals,  which  could  drive  headline growth either up or down."

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

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Table showing key figures for Ireland
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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 the 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 the 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 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 agreed with Ireland included financial commitments of €22.5 billion from the European Financial Stabilisation Mechanism (EFSM) and €17.7 billion from the temporary crisis resolution mechanism, 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 (now the Ireland Strategic Investment 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 - present day

Ireland is subject to post-programme surveillance (PPS) until at least 75% of the financial assistance received has been repaid. Barring any early repayments, PPS will last at least until 2031.

The objective is to measure Ireland's capacity to repay its outstanding loans to the European Financial Stability Mechanism (EFSM), European Financial Stability Facility (EFSF) and bilateral lenders.

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

Ireland's Economic Future - an EU perspective