This article is special because my home region, Galicia (Spain) shares some similarities with today's protagonist, Ireland.
By 2022, the number of Irish passports issued for in Northern Ireland has exceeded applications for British passports for the first time. In 2008, Ireland was coined along with Portugal, Italy, Greece and Spain with the term "PIIGS". This pejorative term focused on these states that suffered severely from the 2011 sovereign debt crisis. However, during the SARS-CoV-2 crisis in 2020, the Irish economy grew by 5.9%.
This article aims to shed some light on how Ireland weathered the 2008 crisis, how it fared and what lessons Galicia, and Spain as a whole, could learn.
Ireland's recent history dates back to the 17th century. With the Act of Union signed in 1800, Ireland would gain some autonomy within the United Kingdom, but the rifts between Catholic and Protestant Christians would not disappear. Along with these rifts, repression was on the rise.
Oliver Cromwell, in the 17th century, implemented a policy known as "plantations". Large tracts of land were taken from Irish Catholics and given to English settlers and also to Scottish Presbyterians. As a result, the British landowners cultivated mainly wheat and while the wheat crops were exported directly to England, the Irish peasants were supplied exclusively with potatoes and milk.
In 1845, the Great Famine began. In 1845, a terrible plague appeared in the potato plantations that affected only the potato crop and not the wheat crop. The English Parliament did not take any measures to help the Irish peasantry, so the plague continued to spread, crops continued to be lost and people died of starvation because they had no access to other types of food.
In Scotland, food exports were banned during the potato crisis, and the English sent 200,000 soldiers to Ireland to keep the situation under control and prevent an uprising of the population. Given this precarious situation, many Irish people decided to emigrate across the Atlantic, mainly to the United States.
Figure 1: Destination of overseas emigrants from Ireland (1821-1920). Source: https://whereleprechaunsroam.blogspot.com/2014/07/irish-psyche-effects-of-emigration.html
This famine ended in 1849, but the unrest remained latent. The return of crop failures in 1879 brought new fears of famine. That same year, Michael Davitt founded the Irish Land League, which aimed to gain tenants security of tenure, fair rents and freedom to sell their properties, and this milestone was achieved in 1881.
Irish nationalist aspirations grew in the late 19th century. It is worth mentioning that, since the 1880s, Irish nationalists of the Irish Parliamentary Party (IPP) demanded autonomy from Great Britain. However, during the First World War (1914-1918). During this period bipartisanship was re-established in Irish politics, as all differences between Liberals and Conservatives were subordinated to the goal of defeating Germany.
During an Easter Monday in 1916, an Irish provisional government was proclaimed. The General Post Office and other parts of Dublin were seized; street fighting continued for a week until Tom Clarke, Patrick Pearse and other republican leaders were forced to surrender. Their subsequent execution inflamed nationalist opinion and, compounded by the threat of conscription being introduced in Ireland, led to the defeat and virtual extinction of Redmond's Irish Parliamentary Party (pro-British) in the December 1918 general election.
Sinn Féin supported the republican program announced in 1916 and were led by Eamon de Valera. Eamon de Valera was a surviving leader of the Easter Rising, who campaigned for Irish independence in the United States. The republicans refused to take their seats in the British Parliament and instead created their provisional government.
Simultaneously, the Irish Republican Army (IRA) was organized to resist the British administration and to obtain the recognition of the government of the Irish republic. Alongside this, a guerrilla war was waged: the Anglo-Irish War or the Irish War of Independence (1919-1921).
During this conflict, in 1920, the Government of Ireland Act was passed. It divided Ireland into two self-governing areas, both with devolved powers approaching Home Rule, where Sinn Féin could do nothing to resist partition, which became a reality with the first meetings of the Northern Ireland government and parliament in Belfast in June 1921.
A truce in July 1921 ended the Anglo-Irish War and in December 1921, the Anglo-Irish Treaty was signed. Under this treaty, the Irish Free State was formed, which was established under the terms of the treaty with the same constitutional status as Canada. In addition, Article 12 also stated that Northern Ireland could opt out of the Irish Free State and provided for a commission to establish a permanent border.
The economic situation was precarious and in the August 1923 elections, Cosgrave's party, Cumann na nGaedheal ("Party of the Irish"), won against Sinn Féin.
The cost of postwar reconstruction was immense. In 1923-24, 30% of all national expenditure went to defense, and another 7% went to compensation for property losses and personal injury. Despite these economic difficulties, the government pursued an efficient agricultural policy and carried out major hydroelectric projects. The administration was increasingly centralized; an efficient civil service based on the British model and shielded against corruption was established.
In 1927, the assassination of Kevin O'Higgins by maverick republicans rekindled old quarrels in Ireland, and a strict Public Safety Act was passed. Alongside this, the crash of '29 in the U.S.A., severely impacted this young republic. General discontent with the government led to the formation of a new government, led by De Valera, with the support of the Labor Party.
During this new government, there was a shift from a long-established free trade policy to a radical experiment in protectionism and economic nationalism. An example of this was in 1932. The executive made widespread use of tariffs, quotas, import licenses, and similar devices to protect the domestic market from foreign competition, and also expanded state-sponsored agencies in industry and commerce. Although manufacturing employment had doubled by this time, the initial base was so low that this increase was quite insufficient for Ireland's employment needs.
For de Valera it was paramount to remove the elements of the Anglo-Irish treaty that were restrictive to Irish independence. It should be mentioned that, in 1932, Dublin stopped the transfer of land revenue to the British treasury.
In retaliation, in July 1932, London imposed import duties on most Irish exports to the UK to recoup its losses, and the Irish retaliated in kind. This would allow de Valera to profit, as he cloaked his protectionist policies in patriotic rhetoric and blamed Britain for the growing recession in Ireland.
In April 1938, London and Dublin signed a financial agreement, settling the land revenue dispute and a trade agreement that eased the tariff war. The defense agreement completed the process of establishing Irish sovereignty and made possible Ireland's neutrality in a European war. During World War II, the shortage of imported supplies in Ireland dispelled any notion of economic development and the overriding need was to secure basic necessities. It is worth mentioning that, in 1950, Dublin's trade dependence on London was 90%.
This economic situation was to change in the 1960s. The then Secretary of the Department of Finance, T.K. Whitaker, developed and implemented a new strategy with three key elements.
T.K. Whitaker (1916-2017), speaking at NN.UU. Source: https://presspack.rte.ie/2017/01/25/nation-builders-t-k-whitaker/
First, capital subsidies and tax concessions were granted to encourage export-oriented manufacturing. Second, the Industrial Development Authority was given the task of attracting foreign companies to Ireland, also with the aim of exporting, and protection was gradually dismantled in exchange for greater access to foreign markets. In 1965, the Anglo-Irish Free Trade Area Agreement was signed in 1965 and accession to the European Community in 1973.
Major efforts were also made to improve the physical infrastructure: electricity, telephones, roads and other means of transportation and the emphasis on education, completed in 1965 under the presidency of Professor Patrick Lynch, presaged the great expansion of education.
This plan of opening up to the exterior worked during the sixties. It should be mentioned that a large increase in exports of manufactured products was achieved, most of the increase having come from new foreign-owned companies that exported most of their production. The 1967 Law tightened the conditions of labor dismissal. In the event of dismissal, the competent minister may make a reimbursement payment to the employer of up to 60 % of the statutory severance pay.
A decisive turning point came in 1972 and during the oil crisis in 1973. For the first time, policymakers deliberately budgeted for more expenditure than they could collect in tax revenues.
Initially, a large increase in manufactured exports was achieved, most of the increase having come from new foreign-owned firms exporting most of their production. However, beginning in the 1980s, concerns about the high and growing dependence on foreign industry worsened as the flow of foreign investment fell and nearly 10,000 jobs were lost in foreign firms.
At the same time, there was increased pressure on Irish labor legislation. Increasing pressure from both employers and trade unions, political concern to address the perceived inflationary outcome of free collective bargaining and the increased intervention of the European Commission in the regulation of the individual employment relationship would contribute to a further relaxation of labor legislation from the 1980s-1990s onwards'. It is worth mentioning that unemployment rose from 7% in 1979 to 17% in 1986, when two thirds of the unemployed had been out of work for six months or more.
This economic mismanagement hindered any effort to control the crisis and unemployment and emigration increased. But from the 1990s onwards, the situation would change dramatically in Ireland.
During this decade, Dublin experienced tremendous economic growth. The advent of a single European market in the 1990s encouraged many of these companies to become more competitive. The Irish high-tech sector, made attractive by a corporate tax rate of 12.5%, stimulated economic growth and helped reduce unemployment to historically low levels. By the year 2000, the unemployment rate had fallen below 4% and long-term unemployment had virtually disappeared.
These measures would allow Dublin to experience during the period 1995-2007, one of the fastest economic growths in the EU, e.g. in 2008, Ireland became one of the ten richest states in the OECD. In addition, Dublin attracted strong inward investment from foreign multinationals, such as Microsoft and Google, attracted by low corporate taxation and a pool of skilled labor.
During this fraction of time, since 2000, the Irish government's investment in human resource training increased tenfold. Ireland used European funds for training and research and the creation of a network of institutes of technology. In addition, students were targeted so that 60% of them opted for technical or business-related careers.
This period of economic expansion also fostered a major boom in the construction sector. In 2008, construction accounted for 25% of Irish GDP and 20% of the country's jobs. The construction boom was financed by rapid growth in bank lending. Major Irish banks took on more risk and increased lending due to optimism about the continued growth of the Irish economy.
Figure 2: Ireland: rising from the ashes (2001-2015). Source: https://financialpost.com/investing/global-investor/how-ireland-pulled-off-an-economic-miracle-that-rivals-china-india
The global credit crisis of 2007-08 hit Ireland particularly hard. Major Irish banks suffered huge losses due to their exposure to subprime defaults in the United States. Alongside this, by 2010 the major Irish banks were facing failure.
In 2008, the Irish government agreed to recapitalize the major Irish banks Allied Irish Bank (AIB), Bank of Ireland (BoI) and Anglo Irish Bank. However, in 2010, even this was insufficient, and the Irish government required a bailout from the IMF and the EU to ensure that the banks did not fail.
In contrast to other states such as Italy, Greece and Spain, Ireland adopted a very strict austerity package. Irish governments stuck rigidly to austerity policies, increasing tax rates (e.g. VAT to 22.5%) and implementing cuts in both capital and current spending.
Moreover, thanks to the flexibility of Irish labor regulations; employers were able to reduce payrolls when conditions warranted. Employment in Ireland was quick to pick up as the recovery took hold. Since January 2013, employment in Ireland has grown at an average of 2.3% year-on-year.
Another key measure was debt reduction. In 2013, Irish public sector debt relative to GDP peaked at 123.9% , but fell to 75.6% by the end of 2016, thanks to rising GDP and falling debt. This effort was the result of the government gaining greater control over spending and improving the country's credit rating, which allowed officials to roll over the remaining debt at lower rates.
Dublin managed to maintain the same low corporate tax rate of 12.5%. This allowed large companies from all over the world to set up in the emerald isle. According to figures from the U.S. Chamber of Commerce, there are some 700 U.S. companies operating in Ireland, including Intel, Dell, Google, Hewlett Packard, Facebook, Apple, among others. This allows Dublin to be one of the largest software exporters globally.
Thanks to this, in 2015, GDP in Ireland registered a growth rate of 26.3% and was the first foreign direct investment receiving market in the EU and the fourth worldwide (only behind the USA, China and Hong Kong). In addition, Ireland has been able to make some of its companies global pioneers. Examples include Primark and Ryanair.
The Irish company, Keenan, generates individualized information about the animals that is stored and then sent to a nutritionist, who personally contacts and advises the farmer. The first sensor went on the market in 2014 and has managed to drastically reduce animal mortality and has customers in 40 states, including Spain.
After the Brexit in 2016, all eyes turned to Ireland. The UK is a key partner for Ireland, both in terms of trade and investment, for example, Irish exports of goods and services to the UK amounted to almost €37 billion in 2015 and British foreign investment directly and indirectly provides around 80,000 jobs in Ireland.
The official withdrawal of the UK from the EU took place in January 2020. Dublin faces the fact that the border with Northern Ireland is an external EU border, which will require much more control, security and paperwork than at present. The first consequence of Brexit was seen in 2022. In this year, the number of Irish passports applied for in Northern Ireland exceeded applications for British passports for the first time. However, in the years to come, the consequences of Brexit in Ireland will become more deeply known.
Alongside the Brexit challenge, the health crisis caused by SARS-COV.2. Unlike in other states, the Irish government acted quickly, with the introduction of a series of measures in the health, labor and business sectors. The emphasis has been on protecting people's health and safety from the spread of the virus. This approach allowed Dublin to be the only EU state, where its economy grew (3%), driven by medical and pharmaceutical exports.
According to the European Commission, the Irish economy was particularly boosted by "exports of multinational companies specializing in medical equipment, pharmaceuticals and IT services."
At the end of February 2022, the ongoing Russian invasion against Ukraine impacted Ireland. Dublin supports and closed its airspace to all Russian aircraft. Unlike other EU member states, Ireland is less exposed to gas supply disruption, as much of Ireland's gas comes from the UK, and it also has its own source in the Corrib field. Ireland's main challenge is going to be housing.
According to a new report from property portal Daft.ie, house prices in Ireland increased by 2.4% on average during the first three months of 2022. The average selling price across the country in the first quarter of 2022 was €299,093, up 8.4% compared to the same period in 2021.
This housing issue will affect Ireland's economic future. However, Dublin has managed to make the harsh economic past, such as, for example, the 2008 crisis, no longer the macroeconomic reality. Low taxes, greater labor market flexibility and greater economic freedom have allowed Irish GDP per capita ($) rise from less than $700 in 1960 to $83,813 in 2020 despite the 1973 and, more importantly, the 2008 crisis.
Ireland has transformed from an economy highly dependent on the primary sector to a center of software excellence in Europe. Dublin is home to more than 900 software companies, both multinational and domestic, employing 24,000 people and generating €16 billion in exports annually.
Suggested readings:
1- McHugh, R., 2018. Ireland is the World´s second largest software exporter Technology, news for Ireland, Exporting,Ireland,Technology,. Businessworld.ie. Available at: https://www.businessworld.ie/technology-news/Ireland-is-the-World-s-second-largest-software-exporter-571274.html
2-Purdue, D. and Huang, H., n.d. Brexit and its Impact on the Irish Economy. National Treasury Management Agency. Available at: https://www.ntma.ie/uploads/publication-articles/BrexitIrish-Economy.pdf
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