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.

This 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, have 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 strengthening Economic and Monetary Union (EMU).

The EMU involves Member States coordinating economic and fiscal policies and sharing a common monetary policy so that the EU economy as a whole can flourish and still be robust enough to withstand financial shocks.

A strong, integrated economy means individual Member States can take advantage of the EU’s greater size and internal efficiency and benefit from economic stability, better growth prospects and increased employment.

The crisis showed that while Europe had made significant progress on EMU since it was introduced in 1992, the job wasn’t finished as the economies of some Member States, including Ireland’s, were less able to withstand the global financial slump.

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

In December 2017, the Commission set out a roadmap for deepening the EMU, which outlined 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 EU 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 proposals include budgetary instruments to increase Euro Area stability and the possibility of a 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

Banking Union

One of the key elements of the European Commission’s 2017 roadmap was completing the Banking Union, which applies to countries in the Euro Area but other Member States can also join.

The Banking Union has a single rulebook and currently two pillars - the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM) - that are now in place and fully operational.

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Infographic about the Banking Union
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The SSM is a new system of banking supervision by the ECB and the national supervisory authorities of participating Member States.

The SRM is designed to respond quickly and effectively to failing banks with minimum costs to taxpayers and the economy. The Single Resolution Board can resolve a failing bank over a weekend utilising the Single Resolution Fund (SRF) that banks and investment firms contribute to.

The European Commission has also proposed a European deposit insurance scheme (EDIS) for bank deposits in the euro area that would be a third pillar of the Banking Union.

This would provide better insurance cover in the euro area than the deposit guarantee schemes (DGS) that currently ensure deposits up to €100,000 are protected.

European Semester

A key tool in EU economic policy coordination is the European Semester. It allows EU Member States to discuss their economic and budget plans and monitor progress at specific times throughout the year.

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.

The Commission’s role in the Semester is to undertake a detailed analysis of each country's plans for budget, macroeconomic and structural reforms.

It then provides governments with country-specific recommendations (CSRs) for the next 12-18 months to help prevent economic problems developing in individual Member States and spreading across the EU.

The Fiscal Treaty that came into force in 2013 strengthens confidence in Europe’s economies by limiting yearly structural deficits of Member States to 0.5% of GDP.

Member States have agreed on a set of rules called the Stability and Growth Pact (SGP) that are designed to ensure that countries in the European Union pursue sound public finances and coordinate their fiscal policies.

The SGP sets fiscal planning and policy parameters for Member States while taking into account the ups and downs of the economic cycle.

It also ensures that Member States adopt appropriate policy responses to correct excessive deficits when they breach thresholds or violate debt rules.

Member States still have complete autonomy to implement their own financial policies and tax regimes but they are legally bound to keep within agreed parameters.  

The road forward

More work needs to be done to protect and strengthen Europe’s economy and the European Commission is still driving proposals forward to further benefit EU citizens and businesses.

The Commission has called on EU leaders to keep up the political engagement to lay down the foundation of a Capital Markets Union (CMU) that will mobilise capital in Europe.

The CMU aims to make it easier for EU companies to get the finance they need to grow by breaking down barriers for cross-border investments.

It’s a key element of the Investment Plan for Europe and will provide businesses with a greater choice of funding at lower costs so they can expand and create jobs.

The CMU will also mean more choice for consumers, allowing them to buy cheaper and better investment products, and enable financial services providers to offer their services in other Member States.

The Commission is proposing to create a Reform Support Programme (RSP) and a European Investment Stabilisation Function (EISF) too.

The RSP will support priority economic reforms in all EU Member States, with an overall budget of €25 billion.

The EISF will help stabilise public investments and facilitate rapid economic recovery from economic shocks in Euro Area Member States and countries participating in the European Exchange Rate Mechanism (ERM II) with low interest loans of up to €30 billion that can be rapidly mobilised.

Ireland's Economic Progress

The European Commission’s Spring 2019 European Economic Forecast predicts GDP growth in Ireland to moderate to 3.8% as support from the external environment weakens.

The Ireland country report also states that underlying economic activity is expected to remain robust, driven by investment in construction and positive labour market developments.

The government deficit is projected to turn into a surplus, but risks to the fiscal outlook remain.

GDP growth is forecast to be 3.4% in 2020 on the back of a less benign external environment, including increased uncertainty, not least the terms of the UK’s withdrawal from the EU, as well as possible changes in the international taxation and trade environment.

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

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Table showing key figures from the Spring 2019 Economic Forecast
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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 Euro Area 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 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 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 Business, Economy, Euro

European Economy Explained

Department of Finance

Memo: The EU's Economic Governance Explained

Ireland's Economic Future - an EU perspective