The wave of financial disaster has circled the globe hitting all major economies.  We've already reported on the situation in <link to Iceland article> Iceland </end link>, as one of the most dramatic collapses in Europe.  Now Ireland is experiencing an even deeper recession than their neighboring countries.

The Lay of the Land

Ireland is relatively small, roughly the size of Pennsylvania. You can drive the entire length in about five hours. Then in another four hours you could start on the east coast and drive clear across the width of the country--that is until you got to west side and had to stop frequently while herds of sheep crossed the road, which you will definitely have to do because sheep are in abundance.

There are three main areas of Ireland:

In the past, you could get a fairly accurate impression of Ireland by simply thumbing through travel brochures—colored photos that depicted the rich culture, music, dance, and breathtakingly beautiful countryside. A booming economy was never part of the visual imagery—there never had been one.  In fact, as recently as the early 1990's Ireland was on the verge of bankruptcy and looking to the International Monetary Fund for a potential bailout.

But during the late 1990s Ireland began to undergo a transformation that was as sweeping as it was swift. Property developers started moving in bringing unexpected opportunity and growth, jobs became plentiful and the economic turnaround was so dramatic, the Irish themselves started to believe their luck had finally changed and that maybe they really did live up to the new name: Celtic Tiger.

Phases of Change

There were four distinct points in time during the 13 years that marked Ireland's economic changes.

Ireland had positioned itself very well economically and was able to go through the economic cycles at a much faster rate than bigger countries. When the EU infrastructure dollars started coming in, the country was ready to start building. It seemed that overnight ordinary Irish countrymen were enjoying a lifestyle once thought only available to those "Danny Boys" who had long ago immigrated to far-off lands of opportunity.

Ready for the Dot Com Era

As part of its strategic planning, the Irish government put a lot of effort into restructuring the country's educational system, especially grades K-12, and also nationalized the university system. This played a big part in the economic renaissance by providing a large, well-educated work force. And it also prepared the country for the coming Internet revolution. The Ireland of the 21st century is a dynamic, ethnically diverse, culturally rich country with more than half of the population being under 30, well educated and tech-savvy.

For information technology-based US multinational corporations, Ireland offered an attractive gateway into the highly lucrative EU market. It was a perfect set up.  Ireland was a member of the single EU market, it had a low tax rate coupled by special tax agreements between Ireland and the US, and especially important, there was no language barrier between corporate managers back home and a well-educated foreign workforce.

But we all know what happened when the dotcom bubble burst, we just might not have realized that it also hit Ireland. The crash dealt a heavy blow to the Celtic Tiger, which had become overly reliant on highly mobile and fast-moving multinationals like Lucent, AIG, Microsoft, Intel, Dell and Hewlett-Packard.

Nevertheless, towards the end of 2007, Ireland was still boasting the highest per capita income in the EU and their economy was growing at a furious pace. This growth was not only staggering compared with most of its EU partners; it was the most dramatic economic performance in all the 90 years of Ireland's independence—a long dreary period in which unemployment was as high as 20%, at least 50% of the population left the country to find a better way of life, and 30% of those remaining lived below the poverty line.

Booms in both housing prices and credit markets, boosted growth by an annual average of 6.5%. While strolling through Dublin you couldn't ignore the cranes that dotted the skyline above countless construction sites-- new office buildings and business retail outlets were cropping up everywhere.  And so were upscale luxurious housing developments that were selling at skyrocketing prices.

Hordes of foreign construction workers, mostly from Poland, poured into the country to help in building the infrastructure. The economy was riding high.

The Unraveling

But Ireland was not immune to the housing/property bubble, and when the effects of the global melt down hit their shores, many construction sites were abandoned, leaving scaffolding and catwalks hovering over an exposed landscape—remnants of a construction boom that had gone bust.

The extent of downside risk to the Irish economy is hard to measure, but some experts believe a forecast of negative economic growth up to 2011 may prove optimistic. The economy shrank by nearly 2.5% in 2008. According to the Irish Economic and Social Research Institute, unemployment is expected to rise to between 12 and 15%--some predict it could even get as high as 20%.

The level that unemployment figures eventually reach will depend in part on how many of the recent Polish immigrants choose to remain in the country versus those that high tail it back home. But judging by reports from some businesses, those odds are in Ireland's favor.

Dell Computer, the world's No. 2 computer manufacturer recently announced it was pulling up stakes and moving production from its plant in Ireland to one in the Polish city of Lodz. It is also estimated that a third of the 200,000 Poles once in Ireland are either homeward bound or already there. That news is good for lowering the unemployment figures; not so good for maintaining Ireland's reputation for having a stable pro-business environment.

With nearly 90% of private-sector pension schemes in deficit —some 30 billion euro in all, it's not surprising that headlines are predicting a recession of historic proportions and an avalanche of home repossession cases.

Like the rest of the world, Irish banks are dealing with defaulting mortgages.  But at least they aren't burdened with the toxic assets that are plaguing other economies. Still, the Irish banking system remains in a precarious state, even with liability guarantees and public recapitalization.

When the bubble burst, it left behind a raft of unsold houses and bad debts—it could cost more than $9.5 billion to cover the bad loans to developers. Faced with a collapse in the state’s banking system, the government nationalized Anglo Irish Bank in January 2009, and despite having made an infusion of $4.5 billion to recapitalize AIB and Bank of Ireland, both remain extremely shaky, with their shares virtually worthless.

The housing boom had splintered the cornerstone of Ireland’s appeal: low costs. Suddenly affordable Ireland had become too pricey.

This marks a dramatic turnaround from Ireland's glory days when it appeared that one of the poorest countries in Western Europe had turned into one of the richest. Inflation was on the rise and so were unit labor costs (ie, pay adjusted for productivity) relative to Ireland’s main trading partners.

A study conducted by the European Central Bank revealed that Irish unit labor costs had risen by a third between 1999 and 2007, the biggest jump in the euro area. A healthy surplus in the mid-1990s had turned into a big deficit in only one decade. 

Fraud, Protests and Pressure from Within

The downturn in the economy has created great civil unrest and now Ireland is witnessing the beginnings of a new wave of working class militancy. In February 2009 up to 120,000 people paraded through Dublin to protest how the government is handling the economic crisis.

The marchers were mostly public-sector workers who were outraged by the attitude of the banking industry and the threats to their own jobs and salary levels. They let it be known that this event was the first step in a campaign in support of a fairer way to achieve economic recovery and claimed that it was the "business elite" and their lack of accountability that had destroyed the economy.

NESC: The Five Crises

In March 2009, Ireland's National Economic & Social Council (NESC) called for a national response to the current crisis noting that it's highly doubtful that the economy will ever be able to a return to levels seen during 1990 to 2008. The major criticism is that, in spite of Ireland's rise to economic success, the government does not provide a guide for future development.

According to the NESC analysis, Ireland faces not one but five crises: a banking crisis; a fiscal crisis; an economic crisis of competitiveness and job losses; a social crisis of unemployment, income loss and indebtedness; and a crisis of confidence and national reputation.

It's been an unfortunate convergence of the loss of competitiveness beginning in 2000; a property bubble that went unchecked; and an international credit crisis and world recession set in motion by imbalances in the process of globalization.

The NESC has outlined their views on how to address each of the five crises facing Ireland:

Stabilizing the Banking System -- NESC is not qualified to offer an independent expert opinion on solving the banking crisis, but it does emphasize that the policy response must address the need to assure country's citizens, especially those hardest hit by the downturn, that those who responsible for the financial crisis, and who were major beneficiaries of the boom, are being held accountable and will bear their share of the burden of adjustment.

Ireland also needs to convince its EU partners, other international institutions and the global financial market players that changes are being made to the regulatory, financial and business systems.

Responding to the Challenge of the Public Finances -- The Government's goal of reducing the deficit to below 3.0 per cent by 2013 will require a combination of tax increases and spending cuts. This will require sacrifices at both the individual and national levels.

According to the NESC, these plans have thus far not been adequately explained.  As a result, confusion has left gaps in understanding and caused certain groups to believe they are bearing the brunt of the financial adjustments. More review groups and community involvement could make public services more responsive to the changing and varying needs of citizens.  

Restoring Ireland’s Economic Competitiveness -- The severity of the economic crisis has led to companies closing down, job losses and cutbacks in working schedules.  The situation calls for a coordinated national approach to find solutions to unemployment, falling prices and the growing debt problems among both firms and households.  

Ireland's price level must be adjusted if economic growth is to come through exports rather than domestic demand.  This will require a reduction in the full range of costs, charges, fees and rents that make up the Irish price level when compared to prices of trading partners.

Responding to the Social Challenge – This economic crisis has already created social consequences and it's critical to address the loss of employment, income, savings and pensions.  Practical solutions must be found to create education and training that helps workers now losing their jobs and those unfortunate to be seeking jobs for the first time during this recession.  The goal must be to stimulate the creation of '21st century' equivalents to the special labor market programs that were introduced in the late 1980s and early 1990s.

The NESC is calling for a Jobs and Skills Summit to be established immediately. Labor market authorities, and anyone with a capacity to offer high-quality, market-relevant training and education programs, would identify and implement a set of measures that would get people back to work.

Restoring Ireland’s Reputation -- Ireland’s small size, location and model of economic development make it highly vulnerable to any loss of influence or status in the EU. In the NESC's view, Ireland now faces a crisis of reputation because there is a perceived uncertainty about Ireland's continuing commitment to EU membership and the perception that Ireland’s public finances are vulnerable to default.  

There is a close connection between a country’s international reputation and the credibility and effectiveness of its domestic governance arrangements.  Most damaging is the perception that Ireland has been lax and ineffective in regulating their financial sector and that the response to the banking crisis may not include sufficient change in personnel and government oversight.

International reputation is linked to the ability of a society to act collectively in the process of recovery of its economy. Irish citizens and civil society organizations have been damaged by Ireland’s loss of reputation, which is why they have a vested interest in taking a more active role.  There is too much at stake to simply rely on the government to solve all the problems of restoring the country’s international reputation.

In order to address all five areas of the economic crisis, it's going to require a broad approach that includes involvement by the citizens at large.  Still, framing a shared analysis and an understanding of the crisis is only a first step in creating such wider ownership. The Irish economy may suffer more sharp contractions in 2009-2010 because of the collapse in the construction sector, depressed private consumption and negative export growth.

Conflicting Economic Ideologies

On the whole, the financial crisis has created a strain on conflicting economic ideologies—it's American-style capitalism on one hand versus European-style socialism on the other. As is the case with all workers, the Irish want job security, 40-hour or less work-weeks, paid holidays, low taxes, high salaries with good benefits, and decent working conditions with reasonable prospects for advancement.  

They can't have it both ways.  More capitalism invariably means less socialism and vice versa. In the past, Ireland was too poor to have the opportunity to make a choice between the two. Then, for a brief period it was rich enough that they didn't have to choose. But for the time being anyway, that's no longer the case.

As the old saying goes, "Rising tides raise all boats."  If that's the case, perhaps Ireland will have to wait along with the rest of us until the financial wizards of the world find a way to bring stability to the entire global economy.