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The Honolulu Advertiser
Posted on: Sunday, November 16, 2008

E.U. policy tangles Ireland's economy

By Anthony Faiola
Washington Post

Hawaii news photo - The Honolulu Advertiser

In 2006, homebuilding like this in Galway County was booming along with Ireland's economy. Now the economy is suddenly in recession.

SEAN DWYER | Bloomberg News Service, Aug. 31, 2006

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Hawaii news photo - The Honolulu Advertiser
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DUBLIN, Ireland � When Ireland entered the world's most ambitious economic alliance � the European Union � more than a decade ago, the Celtic Tiger roared to life. Membership in Europe's private club, along with the subsequent adoption of the euro, lured scores of multinational companies to Ireland and ushered in unprecedented growth.

But as Ireland faces its worst recession in a quarter-century, the policies and institutions that bind the European Union now represent some of Ireland's biggest obstacles to recovery. The global credit crunch has silenced the construction cranes that transformed Dublin from a sleepy backwater to a major financial center. And the Irish are finding they have fewer and fewer ways to get them started again.

In surrendering monetary policy to the European Central Bank and agreeing to meet specific budget targets, Ireland and other EU countries are now handicapped in being able to craft responses to specific economic challenges. As a result, economists say, the recession in Europe is likely to be even deeper, and last longer, than the one in the United States, making it more difficult for the global economy to bounce back quickly.

"The structural problems in the United States are on an order of magnitude less than in Europe," said Constantin Gurdgiev, an economist at NCB Stockbrokers in Dublin. "Ireland is now the litmus test for the European model � a test of whether it will work or whether it won't."

Seeking solutions, European leaders converged in Washington yesterday for a global economic summit, pushing for sweeping reforms of the world financial system. Pressing for everything from global guidelines on executive pay to universal accounting standards, they are calling on the United States and other major nations to sign on to their plan within 100 days.

Their urgency stems from the fast-deteriorating economic picture at home. While the United States' economy is expected to shrink by 1 percent in 2009, those of the 27 E.U. nations may contract by an average of 1.4 percent, according to Tom Mayer, chief economist of Deutsche Bank in London. The former dynamos of the region, including Ireland and Spain, appear likely to be hit hardest, with unemployment in Ireland already at an 11-year high and, analysts predict, likely to get much worse.

Before the global downturn, Ireland had emerged as a beacon for foreign companies � particularly those in the U.S. � eager to tap rich European consumers. Ireland benefited from being the only English-speaking nation in the euro zone. But it also greased the wheels of growth by offering companies lucrative incentives and some of the lowest corporate tax rates in the world. From 1995 to 2007, the Irish economy grew at a blistering average of 7.5 percent a year.

That growth was most visible on the Dublin riverfront, where a new breed of developers transformed this city of cozy pubs with a slew of new luxury condos, wine bars and grade-A office space. Fueled by low interest rates on euro loans and a flood of Eastern European immigrants who came to work in the sprouting restaurants and factories of Dublin, Cork and Shannon, house prices in some areas of Ireland jumped as much as 500 percent in a decade.

"The problem, you see, is that things got out of hand," said Mike Wallace, a developer who sports white rock-star hair and an earring. "The money was too cheap, and incentives to build too great. The effect was the opposite of European integration. We became more like America and less like Europe. That has got to change."

European monetary policy, which once worked in favor of fast growth in Ireland, is now working against it. Over the past decade, analysts say, European Central Bank interest rates were probably too low for the situation in Ireland, contributing to a massive credit bubble here that has all but collapsed in recent months.

Now that Ireland needs aggressively low interest rates to stimulate its ailing economy, it is not getting them. This summer, when the economy here became the first in the industrialized world to fall into recession since the onset of the credit crisis, the European Central Bank actually raised interest rates, worried more about the rise of inflation across the euro zone. Although the ECB has since cut rates twice, it has kept them higher than the U.S. Federal Reserve's benchmark rate and the Bank of England's. That strategy, economists say, makes sense for euro zone countries such as France, which is not in recession, but not for Ireland.

To be sure, few in Ireland are talking about abandoning the euro, credited with preventing the runs seen in recent weeks in such nations as Iceland and Denmark, which have kept their own currencies. But many here concede that the euro is also working against a quick recovery. The relatively expensive currency has driven up the cost of doing business in Ireland, worsening woes as Dell and the other multinationals that planted their flags in Ireland years ago shift jobs to countries with lower labor costs.