The Fall of the Celtic Tiger - Ireland and the Euro Debt Crisis

The Fall of the Celtic Tiger
Ireland and the Euro Debt Crisis
Antoin E. Murphy (Department of Economics, Trinity College Dublin)*

*This paper is for the most part based on the book The Fall of the Celtic Tiger: Ireland and the
Euro Debt Crisis (OUP 2013) which I co-authored with Dr. Donal Donovan. A paperback
edition of this book will be published later on this year.

This evening I wish to discuss a number of issues drawn from The Fall of the Celtic Tiger (OUP,

2013), which I co-authored with Dr. Donal Donovan. In doing so I am conscious of a serious

omission from our book in that our analysis concentrated on the Republic of Ireland. Yet, the

Northern Ireland has suffered many of the consequences of the Republic’s financial crisis most

notably in the area of banking because of the problems that have arisen for AIB, Bank of Ireland,

Northern Bank and Ulster Bank. I will be interested in your feedback later as to how the financial

crisis in the Republic may have affected Northern Ireland’s economy.

   This evening I wish to concentrate on a number of issues relating to the fall of the Celtic Tiger:

   (1) The macroeconomic ideological background prior to the global financial crisis of 2008.

   (2) The two phases of the Celtic Tiger era (a) the virtuous Celtic Tiger and (b) the self-

       destructive Celtic Tiger.

   (3) The four interrelated crises that produced the Irish economic implosion.

   (4) The emergence of Minsky style Ponzi financing in the creation of the property market

       bubble that was central to the emergence of the other crises.

   (5) The future.

 Prior to concentrating on the fall of the Celtic Tiger it is appropriate to contextualize it against

the background of the global macroeconomic ideological background in which it was nurtured.

The dominant macroeconomic paradigm prevailing up to 2008 was a combination of New Classical

Macroeconomics and the Efficient Markets Hypothesis. These combined to create the view that

markets are best left alone to self-regulate and that therefore there is no need for intervention

and at most only light touch regulation should be accepted. Interventionist fiscal policy was

eschewed and monetary policy was removed from the control of politicians and vested in central

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banks obsessed with controlling inflation. Furthermore as these approaches suggest that

economic agents are rational there was little acceptance of the view that bubbles could arise and

create financial crises. A cosy consensus emerged which suggested that The Great Moderation – a

term borrowed by the Chairman of the Federal Reserve Bank, Ben Bernanke prior to the US

financial crisis - had arrived and that economists knew how to control business cycles. Stan

Fischer, the former head of the IMF went so far as to say in 2002 that ‘the state of macro was

good’. As a result of this type of thinking, which had permeated macroeconomic theory from the

late 1970s, the macroeconomic architecture of the Maastricht Treaty relating to European

monetary union, was woefully inadequate as there was an over-emphasis on the control of

inflation and little or no attention paid to financial stability. There was no overall pan Euro Area

banking regulation in place as many countries attempted to control their own individual banking

systems. Furthermore in countries such as the U.K. and Ireland separate entities to the Central

Bank were created to regulate the financial system indicating that there was far greater emphasis

on consumer protection rather than financial stability.

  Consistent with these developments there had been considerable financial de-regulation in the

United States, a de-regulation that enabled new types of financial innovation to appear in the

form of a wide range of financial derivatives relating to sub prime mortgage lending to the

property market. This was a decidedly unstable macroeconomic background when the Wall Street

investment banks started collapsing in 2008 bringing in their wake the Great Recession.

IRELAND

The emerging financial crisis crept slowly into the Irish psyche in 2008. At the beginning of that

fateful year, notwithstanding some international concern over the developing sub-prime financial

crisis in the United States, domestic confidence was still high. In its first assessment, the Central

Bank of Ireland forecasted that real gross domestic product (GDP) would rise by about 3 per cent

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in 2008 and suggested that there would be ‘a moderate pick up in growth in 2009 as the

restraining impact of the housing sector’s adjustment wanes’. The view of the Bank was that Irish

economic growth would continue, albeit at a lower rate, and that, despite the incipient downturn

in the property sector, there would be a soft landing for the Irish economy. This benign

assessment mirrored those made by the International Monetary Fund (IMF), the European Union

(EU), and the Organisation for Economic Co-operation and Development (OECD) around the same

time. The year 2007 had been a good one. Economic growth averaged over 5 per cent,

unemployment was only 4.5 per cent of the labour force, the budget recorded a surplus and the

general government debt to GDP ratio stood at an all time low of 25 per cent. This was a highly

impressive macroeconomic score card. Net emigration, a hardy perennial of the Irish economy

and society up to the 1990s, had disappeared and the airports were full of immigrants from

Eastern Europe flown in primarily on the hugely successful low cost Irish airline, Ryanair. But

despite the widely acclaimed success, a good part of the underlying economic and financial

structure was rotting and would soon begin to fall apart. The ‘best of times’ would quickly be

revealed as the ‘worst of times’. Real GDP would fall by 3 per cent in 2008 and by an

unprecedented 7 per cent in 2009. Unemployment would triple to almost 14 per cent end-2010

and net emigration—thought to have been banished—would restart on a very sizeable scale. The

Irish banking system would undergo a near collapse, necessitating a bailout, first via a

comprehensive government guarantee in 2008, and later, by way of massive capital injections to

be paid for by tax payers. Recourse would have to be had to large scale liquidity assistance from

the European Central Bank (ECB). As the deterioration accelerated, the budget deficit would jump

to an unheard of 31 per cent of GDP in 2010 and the debt/GDP ratio would quadruple, rising to

almost 110 per cent at the end of 2011. Household net worth would plummet. Notwithstanding

emergency efforts to salvage the budget and attempts to assess the true scale of the banking

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debacle, the underlying erosion of confidence in Ireland’s ability to handle the damage could not

be stemmed. As the second half of 2010 unfolded, the financial markets, the ECB, the EU and the

G-7 Finance Ministers—meeting in Seoul, Korea, in Ireland’s absence—started to conclude that

nothing less than a full blown financial rescue of Ireland was essential. However, the speed with

which the Irish political leadership reacted could not match the rapidly changing financial

circumstances. It was left to the recently appointed Governor of the Central Bank of Ireland,

Patrick Honohan, rather than the Taoiseach, Brian Cowen, or the Finance Minister, Brian Lenihan,

to announce, in a hastily arranged radio interview from Frankfurt on Thursday, 18 November

2010, the start of the final act of the drama. The Irish government was to enter into discussions

later that day to seek a bailout from the Troika, comprising the ECB, the European Commission,

and the IMF. It was Governor Honohan who ended up informing the Irish people of this

unprecedented event that involved the ceding of a major part of financial and economic

sovereignty to external institutions. This was a telling testimony as to the extent to which

politicians had lost credibility with both the international institutions and the Irish public.

  How could an economy with such an impressive macroeconomic record at the start of 2008 be

transformed into near receivership by November 2010? In this part of the presentation I wish to

concentrate on two elements that are of considerable importance in analyzing the fall of the Celtic

Tiger. These are (1) the way in which four interrelated crises interacted to create a massive

implosion of the Irish economy and (2) the emergence of a classic Ponzi financing system that

fuelled the property market.

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A Story of Four Crises

 The fall of the Celtic Tiger during 2008–10 is a story of four interrelated crises. It was initiated by the

collapse of the property market which precipitated both a banking crisis and a fiscal crisis, and which

then combined to cause the fourth element, the fiscal crisis. The property market crisis resulted from

the collapse of a classic asset bubble. The bubble involved massive overvaluations driven by the general

view that property represented the fastest and easiest way towards wealth and that, at worst, a ‘soft

landing’ for the market would result. It was financed by a banking system that over-lent, a system that

equated profits with the maximization of loan sales, that abandoned portfolio diversification in favour

of concentrating on lending to the property and construction sector and that neglected treasury

management and the principle of maintaining a reasonable balance between its deposit base and

lending. The Irish banks were able to access international wholesale funding – this in turn a function of

the international savings glut - in apparently limitless amounts and at very low interest rates. At the

same time, they faced little or no effective domestic financial regulation, an environment in part

gestated by the economic ideology mentioned above that triumphed the efficiency of markets and the

rational expectations of transactors leading to the view that markets could self-regulated or at worst

only needed some light touch regulation. The collapse of the property bubble led to the banking crisis.

The over reliance on external borrowing exposed the banks to growing liquidity difficulties from mid-

2007 onwards which reached a critical point after the collapse of Lehman Brothers in September 2008.

The bankruptcy of Lehman Brothers caused the equivalent of a nuclear financial winter as financial

institutions topped lending not only to their customers but also to themselves. The contagion effects of

the Lehman B rothers’ bankruptcy led to a near run on the Irish banks at the end of that month and the

need for the government’s guarantee in respect of the banking system’s liabilities on September 29,

2008. This guarantee was aimed at solving a perceived liquidity crisis for Irish financial institutions.

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However, soon thereafter, it became clear that the there was an attendant solvency crisis relating to

these institutions.

  In parallel, the fiscal crisis developed. Government revenue had become hugely over-dependent on

taxes related to property transactions—including stamp duty, capital gains tax, VAT, and direct taxes

levied on the property sector. Once the property market began to collapse, there was a precipitous fall-

off in collections from these sources. At the same time, as economic growth turned sharply negative,

rising unemployment imposed further strains on social protection expenditure. Thus even before the

fiscal costs associated with the need to recapitalize the banks had been taken into account, the budget

moved swiftly from surplus to a massive deficit. The property, banking, and fiscal crises together led to

the financial crisis in late 2010, a crisis which involved several elements. First, the banks’ increasing

inability to access liquidity from the interbank market led to them becoming dependent on funding

from the ECB, both directly and indirectly, via the Central Bank of Ireland. By end-October 2010, such

ECB/Central Bank lending amounted to €120 billion, equivalent to about three quarters of Irish GDP at

the time. Second, from early 2010 onwards, the huge fiscal costs associated with the recapitalization of

the banks emerged more clearly. Third, despite various rounds of emergency measures, the underlying

budget deficit— abstracting from any banking-related costs—continued to exceed 10 per cent of GDP.

All of these elements were reflected in a sharp downgrading of the rating of Irish sovereign debt and

the spread on Irish bond yields soared. By early November 2010, all of Ireland’s external partners, as

well as the G-7, having come to the conclusion that intervention was needed to salvage the situation,

insisted that Ireland apply for a bailout from the EU and the IMF. The final act in the drama had come to

pass.

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Ponzi Financing and the Irish Property Market Bubble

 Commentators have tended to interpret the financing of the Irish property market bubble as a

homogeneous phenomenon. This approach needs to be seriously questioned in order to identify the

dominant virus that produced the collapse of the Irish banking system.

 After falling significantly in 2001, property prices started to move upwards again from 2002 heralding

the arrival of a second phase of the property market boom, a boom that very quickly metamorphosed

into a bubble. The character of this second phase was quite distinct from the first phase that prevailed

up to 2000. Mortgage loans to finance the residential property market grew again at a fast pace aided

by the new fiscal incentives, low interest rates, and financial innovations in the form of tracker

mortgages, 100 per cent (and sometimes higher) loan to value mortgages, extensions of the length of

loans to thirty years and over. However, the boom in residential property prices, though significant, was

not the most important spoke on the wheel of speculation that characterized the property market

boom from 2002 onwards. Indeed, if the property market boom had been solely confined to the

residential property market, it would have arguably created a relatively small bubble in the residential

property market without the consequences that the larger property market bubble produced, namely

the collapse of the banking system. Something enormously more sinister than residential property

mortgages had started to work through the property market in the form of direct lending to property

developers of increasingly larger sums of money. This lending, as will be shown, amounted to multiples

of the money lent into the residential property. More insidiously it contained the real seeds for the

destruction of the banking system.

 Hyman Minsky, a distinguished Keynesian scholar, analysed the way in which bubbles emerged by

focusing on their financing. He suggested three financing phases (1) hedge financing (2) speculative

financing and (3) Ponzi financing. In the hedge financing phase a bank concentrates on ensuring that

interest and capital repayments are made on loans. Speculative financing arises when the bank

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concentrates on interest repayments of loans but neglects capital repayments. Ponzi financing occurs

when the bank lends just on the basis of appreciating property prices and little or no attention is paid to

interest and capital repayments. The Irish banking system moved very quickly away from hedge

financing to speculative financing and even more quickly to Ponzi financing during the period 2002-

2008.

    In order to shows this the analysis focuses on the three biggest Irish covered banks, AIB, Anglo-Irish

and Bank of Ireland.1 The focus is on financing, both domestically and internationally by these

institutions for (1) mortgages and (2) property and construction. In my opinion, and here I differ from

the Nyberg Report where emphasis was placed just on the total of domestic property lending to Irish

residents (Nyberg: 2011, 16), it is important to aggregate both the domestic and international property

lending of the covered banks because the consequences of such lending directly influenced the liquidity

and solvency of the Irish covered banks. Charles Goodhart, a former member of the Bank of England’s

Monetary Policy Committee, astutely encapsulated the consequences of such lending when noting that

banks are international in life but national in death. Bad international loans figured just as prominently

as bad domestic loans on the balance sheets of the banks and when the banks became insolvent

taxpayers were forced to pay for the excesses not only of their domestic lending, but also of their

international lending.

    Bank lending to the property sector is assessed on two fronts (1) residential mortgages and (2) loans

to property and construction, essentially loans to developers2. As Anglo was not involved in residential

mortgages the analysis of the growth in this sector is confined to AIB and Bank of Ireland:

1
  Incidentally, the biggest bank in Ireland at the time was the German owned bank, Depfa, which had transferred its
head office to the IFSC in 2002. Fortuitously for the Irish taxpayers it was taken over by the German commercial
property company, Hypo Real Estate, in 2007, a takeover that was to prove extremely costly for the German taxpayers.
2
   These statistics are based on those compiled by the National Assets Management Agency (NAMA), September 16,
2009

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Mortgage Lending                            2003               2008             Growth Rate

                                                (€ billions)

AIB                                         13.2               31.6             139%

Bank of Ireland                             30.9               60.1             95%

Total                                       44.1               91.7             108%

    The above shows that the two biggest Irish covered banks increased their mortgage lending from

€44.1 billion in 2003 to €91.7 billion in 2008, an overall growth rate of 108%. From the viewpoint of the

domestic economy the above statistics are over-inflated because of the lending activities of the Bank of

Ireland’s mortgage lending U.K. subsidiary, Bristol and West. In 2008 55% of Bank of Ireland’s

mortgages were in the U.K. and 45% in Ireland.

    Lending to the property and construction sector by the three biggest Irish covered banks was as

follows:

Property and Construction Lending 2003                         2008             Growth Rate

                                                            (€ billions)

AIB                                                  11.1              47.9              332%

Bank of Ireland                                       6.6              35.6              439%

Anglo (Loan development book)3                       18.4              74.1              303%

Total                                                36.1             157.6              337%

    These statistics show the extent to which the property bubble morphed into a predominantly

builder/developer Ponzi bubble between 2003 and 2008. By 2003 Anglo specializing in loans to the

3
  A caveat needs to be introduced in the case of Anglo in that the above statistics represent its loan development book
rather than the amount specifically lent in the form of property and construction loans. Anglo made loans also to
successful non property companies such as glassmakers, Ardagh, and electricity generators, Eirtricity. However, the
vast bulk of its loans was to the property and construction sector. This is confirmed by the Nyberg Report which noted
that ‘Anglo was essentially a monoline bank focused almost exclusively on commercial property lending. (Nyberg
Report: 2011, 32)

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builder/developers had captured a sizeable chunk of this apparently profitable and fast growing market.

The growth in the share price and market valuation of Anglo presented a threat for the more

conservative Irish banks, AIB and Bank of Ireland. Rather than examining the nature of Anglo’s loan

book to the property and construction sector and the high risk profile associated with such lending, it

appears that both AIB and Bank of Ireland had become obsessed about the growth performance of

Anglo. The loan book of Anglo grew by 34% (2004), 41% (2005), 45% (2006), 34% (2007) and 10%

(2008). Such growth rates should have sent signals, not just to the Financial Regulator/Central Bank, but

also to both AIB and Bank of Ireland. Instead of questioning the loan quality that such growth would

entail both AIB and Bank of Ireland jumped into the most risk prone area of property lending that

covered under the rubric of ‘property and construction’. Thus, while AIB grew its mortgage book by

139% between 2003 and 2008, it expanded its property and construction lending by 332%. Bank of

Ireland, despite the widely held opinion, that it was more conservative in these operations, expanded

its property and construction lending by 439%, an even faster pace than AIB, albeit from a lower base.

This was in sharp contrast to the Bank of Ireland’s increase in mortgage lending of 95% over the same

period. Anglo, boosted by its apparent continuing success increased its lending by 303% during the

period.

 The yearly rates of growth of property and construction lending by AIB, Bank of Ireland and Anglo

showing a race to the bottom are worthy of close scrutiny:

Rates of Growth of Property and Construction Lending by AIB and Bank of Ireland:

                      2004 2005 2006 2007 2008

AIB                   32%    53%     41%    32%     3.2%

Bank of Ireland       63%    34%     40%    46%     20%

                                                                                                10

Anglo Loan Book        34%    41%     45%     34%    9.9%

(AIB statistics are for December to December; Bank of Ireland statistics are for March to March and

Anglo statistics are for September to September)

  It was property and construction lending to developers that constituted the dominant growth of the

property market bubble between 2003 and 2008. The total mortgage lending by AIB and Bank of Ireland

grew by €48 billion whereas the total growth of property and construction lending by AIB, Bank of

Ireland and Anglo was €122 billion.

  These statistics, comprising both domestic and international lending, contrast sharply with those for

domestic lending produced by the Nyberg Report which showed residential mortgage lending growth of

€56 billion (from €35 billion to €91 billion) and commercial and property lending growth of €64 billion

(from €12 billion to €76 billion). Looking at the Nyberg Report’s statistics it is easy to conclude that the

consequences of the property market bubble arose in near equal measures by residential property

lending alongside commercial and property lending. However, using the aggregated domestic and

international statistics for lending to the property and construction sector compiled from NAMA

statistics, a very different story emerges because this type of lending dwarfed mortgage lending. It was

this lending that produced the rotten core of the Irish banking sector that would ultimately cause the

complete collapse of Anglo-Irish, the nationalization of AIB and the semi-nationalization of Bank of

Ireland. Add to these the activities of the Irish Nationwide Building Society which had increased its

property and construction lending from €3 billion in 2003 to €8.2 billion in 2008 and an even broader

picture emerges of the Ponzi financing activities of the Irish banks.

 There is a case to be made that the banking crisis could have been averted if it was just a case of

dealing with residential property mortgages. The downturn in residential property prices would have

created problems, just as it did in 2001, but it is to be questioned whether it would have created the

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banking crisis of 2008. Contrastingly, because of the size and the pace of growth of lending to the

property and construction sector, the banking system had no chance of surviving the property and

construction bubble created between 2002 and 2008 when the banks lost all sight of the need for risk

management.

 By focusing on the deeply virulent strain of the property and construction lending in creating the Irish

banking collapse it is also possible to answer in part the question as to why so few people were able to

predict the crash of ‘Black 2008’. Quite simply statistics were unavailable to distinguish between the

activities of the commercial property and construction borrowers and the residential property

borrowers. Aside from the executives and boards of the three main covered banks, their accountants,

the Central Bank of Ireland/Regulator, and the NTMA which had sufficient suspicions at one stage to

consider not lending to Anglo Irish, it was extremely difficult to glean from the banking statistics the

extent to which the Irish banking system had abruptly changed direction from hedge based financing, to

speculative financing and even more quickly to Ponzi financing.

The Future

 By late 2010, many domestic commentators, including Nobel Prize winner Paul Krugman, had

written epitaphs on the demise of the Irish economy. It appeared that the Celtic Tiger had not just

fallen but was dead. Yet, three years later, by December 2013, notwithstanding these prophetic

utterances, Ireland had emerged successfully from the EU/IMF/ECB bail-out programme.The

budget deficit had been sharply reduced, from around 13 per cent of GDP in 2011 to a prospective

5 per cent or less of GDP in 2014, and the ten year yield on Irish government bonds had dropped

dramatically, from 14 per cent to 3.2 per cent in [January] 2014 . Notwithstanding the initial

reputational loss associated with the bail-out, foreign direct investment has continued to flow into

Ireland. After flattening out in 2013, consensus forecasts suggest that the economy will grow by at

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least 2 per cent in 2014. The pragmatism and resilience of the Irish people has meant that the

needed adjustment, difficult though it has been for many, has been accomplished without

significant social unrest. Despite all the gloomy prognostications, the fall of the Celtic Tiger has

stopped.

 Nevertheless, the crisis has left a legacy which will continue to weigh heavily for a considerable

time to come. Despite the pick-up in growth, unemployment remains very high, notwithstanding

large scale emigration. The repair of the banking system, weighed down by non-performing loans

associated with the property bubble, has some considerable way to go. The high household debt

burden continues to depress consumption while indigenous enterprises face difficulties in obtaining

financing for new investments. The obligation to further reduce the budget deficit, as mandated

by the EU Fiscal Compact Treaty, will also tend to depress domestic demand and will require

difficult choices among competing expenditure priorities (such as those on health, education,

public sector pay and benefits).

 The recent acceleration of foreign investment, in areas such as the social media is a sign of

continued external confidence in Ireland’s prospects. However, undue reliance on the multinational

sector, to the neglect of indigenous industry, leaves Ireland exposed to exogenous shocks such as

a world economic downturn or changes in international taxation arrangements that could impinge

upon Ireland’s attractiveness as a location for MNCs.

 On the European front, significant steps have been taken to address key weaknesses of the euro

area architecture that contributed greatly to the crises in Ireland and elsewhere.         The Fiscal

Compact Treaty, an elaborate set of rules designed to prevent a re-emergence of fiscal problems is

now in place. Its success ultimately requires political support – an element sadly lacking under the

earlier EU Stability and Growth Pact. It may take some time - and possibly a confrontation with a

major potentially errant EU member – to instill confidence that this time there is sufficient political

unity of purpose to ensure the effectiveness of the new fiscal architecture.

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The other major architectural weakness, namely, the absence of strong centralized bank

supervision, has started to be addressed by assigning to the ECB future supervisory responsibility

for the systemically important European banks. In line with this changed approach the ECB will

conduct stress tests during the second half of 2014, to determine whether any of these banks require

remedial action, including, as noted by the president of the ECB, Mario Draghi, letting some of

them “fail”.

 Addressing the issue of potential future bank failures has led to important additional initiatives. In

a major reversal of earlier policies, there is now explicit euro-wide official acceptance that senior

creditors will be required to bear losses. Official support to re-capitalise broken banks may still be

possible, however.

 These procedures for official involvement to resolve the problems of banks in difficulties were

debated intensively throughout 2013. The political agreement reached in December 2013 involved,

first, the establishment of a resolution fund financed by a continuing levy on banks and second, a

structure that would leave final decisions to be taken at the European political level.

 These arrangements have been opposed by many in the European Parliament, who objected to the

intergovernmental nature of the proposed decision making process, while others voiced concerns

that the procedures would not be sufficiently efficient to deal effectively with a rapidly evolving

banking crisis. However, several “northern” countries, notably Germany, wish to keep their options

open and remain wary of any suggestion of a “transfer union”, i.e. the use of national taxpayers’

money to pay for banking mistakes made elsewhere.

 The above debate took place against the background of the Irish government’s continued quest

for direct “retroactive recapitalization” by the ESM of some Irish banks, with the resources thus

obtained used to reduce Ireland’s sovereign debt burden. This argument is largely based on the

fact that, at the time of the November 2010 bail out, Ireland was prevented by the ECB along with

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the     US Treasury Secretary, Timothy Geithner, from “burning the bondholders” because of

potential adverse systemic financial implications (in March 2011 a similar Irish proposal was

again rejected by the ECB )

.     From an equity perspective, there is a case for retrospective compensation for Ireland for having

“taken one for Europe”, especially since it is now accepted as current policy that bondholders

should be made to suffer losses. On January 24, 2014, in an interview with the Irish Times, Dr.

Jens Weidmann, the current President of the Bundesbank, stated that in late 2010 the Bundesbank

favoured a burning of bondholders, although this was not supported by a majority of the ECB

Governing Council at the time4. On the other hand, Klaus Regling, Managing Director of the ESM ,

recently observed that the sharp improvement in Ireland’s creditworthiness was partly due to the

earlier decision not to impose losses on bondholders.

    There are complex issues involved in a possible ESM retroactive recapitalization, including under

what circumstances it would be financially advantageous for Ireland to avail of such an option. In

any event, the position of Taoiseach, Enda Kenny, that, in July 2012, EU leaders entered into a

commitment to adopt this approach for Ireland has, on several subsequent occasions, been disputed

by senior EU figures involved at the time. A move in such a direction would require sufficient

political support which, at least up to now, does not appear to be present.

    That said, the debt burden of several EU countries remains very high, especially in the case of

programme countries. In the absence of strong economic                   growth and/or significantly higher

inflation, these could well prove insupportable at some stage. EU leaders have already significantly

extended the maturities due under the troika financed bail-out programmes (and lowered the interest

rate further). However, the possibility of further initiatives to alleviate the debt burden (even

including the writing off of some of the EU debt that is a significant proportion of the total debt of

bailed out countries) should not be ruled out. Given the highly successful exit from its bail-out
4
 Irish Times, January 24, 2014. In the same interview , Weidmann observed that the agreement by the ECB in early
2013 to effectively reschedule the terms of the Anglo promissory note ( see chapter 12) , of which he was critical,
might be seen as compensation for the costs incurred by Ireland.

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which has spillover demonstration effects elsewhere in the euro area and the controversial history

discussed above, Ireland could be in a very favourable position to benefit from any such initiative.

 The much delayed – and long awaited - parliamentary inquiry into Ireland’s banking crisis is

now reportedly set to commence its work later in 2014. This inquiry may provide, for the first

time, the opportunity for key public figures to explain directly to the public their actions in the run

up to the crisis. However, it is by no means certain that it will reveal significant new information

not contained in the extensive Honohan and Nyberg reports, while many fear that               political

partisanship aspects could dominate. There are considerable risks that such an inquiry could be

lengthy, expensive, and not well focused.

 An alternative more constructive approach to such a parliamentary inquiry would be to focus on

the underlying weaknesses in economic policy making and governance that lay at the heart of the

crisis. These aspects include the lack of focus on history and the experiences of other countries,

the prevalence of ‘group think “ and the suppression of contrarian views, and a degree of

personalization that served to inhibit the explicit expression of alternative viewpoints and the

systematic analysis of perceived low probability but high cost scenarios. While some might argue

that such tendencies are an inevitable by-product of a small country such as Ireland, some useful

lessons could be learnt from examining the experiences of other small countries with similar

backgrounds Tackling this problem of governance and “culture” is essential to try to avoid a

repetition of policy failures at some later stage .

  In sum, the last year has seen some very positive developments. There is even the possibility that

Ireland could enter a third phase of the Celtic Tiger, mirroring in part the first and virtuous phase

and avoiding the hubris of the banker/developer second phase. However, there is no room for

complacency, given the small and vulnerable nature of the Irish economy. While there has been

considerable progress in resolving the macroeconomic imbalances that gave rise to the crisis,

difficult challenges remain. Chief among them is the need to learn from the lessons of the past and

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to tackle some of the more fundamental problems that drove the economy to a financial abyss. This

is essential in order to lay a sounder basis for the future sustained prosperity of the Irish economy.

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