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Celtic Tiger faces extinction

After Iceland, it is the Irish economy that has seen the most dramatic collapse in Europe at this point in the global downturn. This collapse has left the public finances in chaos, seen the beginnings of a new wave of working class militancy, and put Brian Cowen’s government under severe pressure.

This marks a dramatic turnaround from the days of the so-called Celtic Tiger, the “economic miracle” that had, on the face of it, turned on of the poorest countries in Western Europe into one of the richest.Where the economy had registered a growth rate of 6% in 2007, it shrank by 3% last year, and is likely to see a much larger fall in the coming year. Unemployment has more than doubled from 5% in February 2008 to 10.4% in February 2009, and is rising fast. Faced with a collapse in the state’s banking system, the government nationalised Anglo Irish Bank in January, and despite having spent €7bn recapitalising AIB and Bank of Ireland, both remain extremely shaky, with their shares virtually worthless.

The reasons why the Irish boom has turned into such a dramatic bust are to be found in the character of the boom itself. There were a number of factors at work, notably EU structural funds which helped to modernise the agricultural sector and to improve infrastructure, and the Social Partnership regime under which the trade union leadership agreed to pay restraint and a clampdown on militancy in exchange for the promise of a seat at the table when economic policy was being formulated. But the real motor of the boom was Foreign Direct Investment. Essentially, what transformed the Irish economy was the enormous wave of multinational corporations setting up operations in Ireland during the 1990s.

The Irish state succeeded, in the short term at least, by following neoliberal strictures more slavishly than almost any other country. For three years in a row, between 2002 and 2004, the AT Kearney/Foreign Policy Globalisation Index ranked the Irish economy as the world’s most globalised. This openness to global forces by itself would render a small economy like Ireland’s vulnerable to a global recession, whereas it had been more protected during the recession of the 1970s. But even within this context, the specific dependence of the Irish economy on US multinationals has been the most important feature. The figures are stark. The 600-plus US companies operating in the Irish state currently employ some 100,000 workers, amounting to 70% of all workers in foreign-owned business. And this is without counting those businesses that had grown up to service the multinationals. Leading financial pundit David McWilliams pointed out that:

“Close to 80 per cent of Irish exports come from US multinationals and, for those who doubt the significance of the US in Ireland, consider the following: the combined output in Ireland of Dell, Microsoft and Intel amounts to 20 per cent of Irish GDP.

US Recession Hits Ireland

“Ireland benefits hugely from a strong US. When the US is confident, it invests abroad and we get a disproportionate share of the loot. For example, since the end of the Cold War, Ireland has received twice as much US investment as India and China combined.” (Sunday Business Post, 24 August 2008)

It is quite clear, then, that the current recession in the US is bound to have an enormous negative impact on Ireland. At a time when US multinationals are shedding large numbers of jobs, not only do they have a disproportionate number of subsidiaries in Ireland, but these make up a disproportionate sector of the Irish workforce. This has already begun to make itself felt in the unemployment figures, and the trend is likely to accelerate. Dell’s decision to move its PC production operation from Limerick to Lodz in Poland as part of a global cost-cutting drive has stoked fears that Microsoft and Intel, other crucial players in the Irish economy, may join the exodus. Even if they do not, Dell alone has been Ireland’s largest exporter and its Irish operation accounts for 5% of GDP. And economic measures being introduced by the Obama administration may in fact provide major disincentives for US corporations to site their operations abroad.

The reliance on FDI has made the economy vulnerable in other ways. Part of the package for attracting multinationals has been an extremely low corporation tax regime. US multinationals produce $60bn of goods and services in Ireland every year, while only paying $2.5bn in corporation tax. Public finances have therefore relied on the high income taxes levied on the working class, and will be further undermined by rising unemployment. Nor have there been any restrictions on the repatriation of profits. Indeed, a large part of Ireland’s healthy-looking economic figures from the last 15 years has been made up of multinationals simply shuffling profit figures within their own organisations to take advantage of the tax regime, and do not represent any real production in the economy.

Nor have Dublin governments used the proceeds of the boom to build up an indigenous economic base. That strategy was abandoned by the Lemass government in the 1960s, and the rejection of any attempt to build up native Irish industry has virtually become a religious dogma amongst Irish economists. Even the outgoing US ambassador to Dublin, Thomas Foley, recognised this as a problem in a recent interview:

“The government’s low taxation policy was ‘clever and very steady’, but measures were needed to build an entrepreneurial class to invest in goods and products here.

“‘I’ve been surprised not to see more internal business generation. Most entrepreneurial activity has been in real estate development.’” (Sunday Business Post, 9 November 2008)

Foley recognises a real problem, as the two sectors two have grown spectacularly as an offshoot of the boom have been retail and construction, the latter to the point where Ireland was actually needing to import construction workers for the first time in recorded history. Both growth sectors were based on an enormous property bubble, with some sites in South Dublin selling to developers for tens of millions of euro per acre. The bubble itself had been fuelled even further by Irish membership of the euro, leading to the economy being subject to artificially low interest rates. But even in 2007 the property market had begun to fall, and in the course of 2008 property prices fell by 10%. Although the country is now littered with empty buildings built at the height of the construction boom, the indications are that the market is still significantly overvalued and has some way to fall yet.

All Forecasts Wrong

The collapse of the housing bubble is significant in itself, with some 12% of the workforce directly employed in the construction industry and with possibly as many again dependent upon it. But it has also fed directly into the financial crisis, with the Irish banks being seriously overexposed to mortgage debt, which raised the possibility of a total collapse of the state’s financial system similar to that seen in Iceland.

To summarise, we have a banking sector in a state of collapse, a deflating property bubble, a huge construction industry in freefall and an economy highly dependent on multinationals who are beginning to pull out their investments.

So far, the government’s response has been to implement a deflationary package that contrasts sharply with the stimulus packages announced by other governments. Finance Minister Brian Lenihan’s budget, presented in October, marked the harshest austerity package since the 1980s. There have been increases in personal taxation, although the 12.5% corporation tax rate remains unchanged. There have been swingeing cuts in public spending, despite the Irish public sector being one of the smallest in Europe. And the burden is being heaped disproportionately on the most vulnerable in society, with regular announcements of even more stringent means testing in Ireland’s already meagre social welfare system.

These measures have not restored much confidence even among bourgeois commentators. David McWilliams, who had done more than most to promote the image of the new booming Ireland, is now issuing dire predictions:

“Making one drastic policy mistake in fuelling the boom with cheap money and tax cuts was bad enough, but making a second one, cutting expenditure and raising taxes in the bust, would be inexcusable…

“The consequences of today’s Herbert Hoover approach to the economy will be exactly what happened in the US at the beginning of the 1930s, where a bad situation is made worse by policy mistakes. The Irish depression of 2010 is going to be entirely man-made. Don’t forget this when it comes to apportioning blame.

“Here’s the deal. With a few notable and well-known exceptions, the consensus economists who talked about how the housing boom would plateau and achieve a ‘soft landing’ are the same people who are now suggesting that Ireland should deflate its way to growth. They are aided and abetted by mandarins at the Department of Finance who have got all of their forecasts wrong. Why are we still listening to these discredited people? They know nothing!” (Sunday Business Post, 8 March 2009)

Pay cut or pension levy?

Much more important, though, is the response of the working class. Brian Lenihan’s announcement in last year’s budget that the over-70s would lose their automatic entitlement to medical cards guaranteeing low-cost health care led to an enormous public outcry, threatened the government’s fragile majority and pushed Lenihan into a partial climbdown. The most recent flashpoint has been the imposition of a “pension levy”, in fact amounting to a pay cut of at least 5%, on public sector workers. This was the trigger issue behind February’s march of over 100,000 workers in Dublin, the largest anti-government mobilisation since the tax revolt of the late 1970s.

The mass rally took place under the leadership of the Irish Congress of Trade Unions, whose normally supine leadership seem to have woken up and decided that some minimal activity, and some militant-sounding statements, were needed to go some way to meeting the concerns of their members. This at least demonstrates that the trade union movement retains a mass base and is the obvious channel for working class anger to express itself. In fact, the concerns expressed on the march went well beyond sectional public sector issues and the participants extended well beyond the usual suspects. Very large numbers of private sector workers, fearful for their own futures, took part. Even organisations representing the police and army rank and file had a visible presence on the march. The anger has further been fuelled by revelations about huge frauds in the banking sector and about the corruption of a “Golden Circle” of politically connected businessmen.

There has also been a dramatic political backlash against the Cowen government. Fianna Fáil, the dominant party in the state since the 1930s, is currently registering its lowest poll results in history. Its small coalition partner, the Green Party, has less far to fall but still risks electoral wipeout. Local and European elections scheduled for June, as well as two upcoming by-elections in Dublin, will provide a stern test for Cowen. At the moment, the main beneficiary of FF’s unpopularity is the Labour Party – although Labour leader Eamon Gilmore has studiously avoided saying anything very radical, he has nonetheless struck enough of a populist tone to look like an attractive alternative to Cowen.

The question will be whether the anger and increasing militancy of the working class can find a vehicle able to take the struggle forward. The trade unions are organisationally weak, with a low density in the multinationals, and their traditions of militancy are long atrophied. While the government looks shaky, opposition from Labour and Sinn Féin has been timid and faltering – SF supported the bank bail-out in the Dáil, while Labour decided to cast a populist vote against only when it was clear the measure would pass. As the anti-austerity movement takes shape, it will need to formulate its own programme and develop its own leadership, which may well bypass large elements of the traditional leadership.

Andrew Johnson is a socialist activist in Ireland

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