Policymakers in Ireland will have to consider a more pro-active solution to Ireland’s debt crisis, writes Professor John Ryan

The Eurozone’s problems are not merely the result of profligate borrowing by the peripheral nations. They also reflect earlier profligate lending by the core nations.  Imposing austerity on Ireland cannot, on its own, solve the Eurozone’s problems.

Until about 2000, the so-called Celtic Tiger growth model was secured by strong exports and moderate wage demands. This then changed as property prices and the construction bubble gained momentum. That boom maintained employment and output growth until 2007 despite a loss of wage competitiveness. Irish and foreign banks fuelled the boom, especially from 2002.

The problems in Ireland leading up to the crisis were twofold – linked to financial markets and to politics. Two reports were commissioned by the Irish government to learn the lessons of what went wrong.

As for the financial markets crisis, the “Misjudging Risk: Causes of the Systemic Banking Crisis in Ireland” report in published in March 2011 was highly critical of the Irish banks, financial regulators and the Department of Finance during the emergence of the property bubble which collapsed during the US subprime crisis. The report of the Commission of Investigation into the Banking sector in Ireland carried out by Peter Nyberg; former Director General of the Financial Markets Department at the Finnish Ministry of Finance was completed in March 2011. As the Nyberg report points out, the roots of the Irish crisis were inadequate risk management practices within Irish and foreign banks and the failures of the Irish financial regulator to supervise those practices effectively.

The Fine Fail/Green government which succeeded the Fianna Fail/Progressive Democrat government  also showed that it was unable to manage the country’s financial affairs. The Irish Department of Finance contributed to the financial implosion of the Irish economy through its incompetence in economic management. The Irish Central Bank and the Irish Financial Services Regulatory Authority failed miserably, while the European Central Bank (ECB) presided over a financial sector operating under a lack of oversight with banks in the core of the Eurozone lending recklessly to Irish banks.

With regards to the political causes of the crisis, the Irish government initiated an investigation into the financial crisis in 2010 under the leadership of Canadian expert Rob Wright called “Strengthening the Capacity of the Department of Finance”, a report of the independent review panel. The report was completed in December 2010 but not made public until after the Irish election in February 2011. The report severely criticised the Fianna Fail/Progressive Democrat government and the Irish Department of Finance for causing most of the damage to the Irish economy and allowing tax breaks that encouraged the unsustainable property boom. 

The Fine Fail /Green government supported by much of the opposition, pledged, on behalf of the Irish people, to guarantee the banks without knowing whether the banks had a liquidity crisis or a solvency crisis. This is more shocking than the revelation that executives in Anglo Irish Bank knew that the bank was insolvent and said nothing, while the Irish people were put on the line for its huge losses.  Former Prime Minister Brian Cowen and Finance Minister Brian Lenihan were incompetent and failed to see the financial implications of the massive mistake they were making with Irish taxpayers money. The opposition parties failed to seek any assurance before giving their support to the guarantee.

And by guaranteeing banks’ debts, all EU governments risked their credibility and ultimately their solvency. Since the bank guarantee decision of 29 September 2008, debate continues to rage as to the role it played in Ireland’s financial and economic crisis. To many, the guarantee was a fatal error that led to a ballooning of Ireland’s debt and imposed huge costs on the voters and tax payers for years to come.

There are serious legal, political, and ethical questions that must be asked about how the ECB has behaved during the Eurozone crisis. Look, for example, at the 2010 threat that if Dublin did not repay private creditors of private banks, the ECB would effectively blow up the Irish banking system or force Ireland out of the Eurozone.

There remain many serious challenges to Ireland and the Eurozone, not least a sceptical public; populist political parties and constitutional hurdles such as the German Constitutional Court ruling on the ECB’s Outright Mechanism Transactions programme.

There will be the need for Irish policymakers to consider a more constructive and pro-active solution for Ireland’s difficult situation and to consider sovereign debt restructuring which may be undesirable but unavoidable.

Professor John Ryan is Research Associate at the Von Hügel Institute of St Edmund’s College, University of Cambridge