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Causes And Consequences To The Irish Recession

1401 words - 6 pages

Since the turn of the millennium Ireland witnessed unprecedented growth, in stark contrast to the economic hardship of the 1900’s. Ireland became one of the most prosperous countries in Europe during the 2000’s. Times were good for Ireland as unemployment was low, growth and GDP was growing year on year and inflation was constant. In 2008, all this was to change and Ireland witnessed the worst recession in its history. The banking crisis, the construction sector and poor regulation were the major contributors in the Irish recession. A fiscal crisis erupted, NAMA (National Assets Management Agency) was established to secure bad loans in banks, and a EU/IMF bailout was agreed which burdened Irish taxpayers. I will explore the causes and consequences of the crisis in this essay.
‘The Celtic Tiger’ was the term used by Irish people to describe the rapid growth Ireland was witnessing. Ireland was referred to as ‘Europe’s shining light’ since the start of the Celtic Tiger. It had only been 10 years prior to this that Ireland had been branded as the’ poorest of the rich’ in Europe (Ireland shines, 1997). Open-minded industrial policy targeted MNC (Multi National Companies) to locate in Ireland around 1987. The government had decided Ireland would become a knowledge based, export driven economy. After the 90’s Ireland witnessed major growth and Irelands harsh economy of 1987 when unemployment was 18%, national debt was 125% of GNP and growth averaged 0.2% of 5years seemed a long time ago (Murphy, 2000).
Around the turn of the millennium Ireland had a small housing stock, with the figure being the smallest in Europe. With income growing and the population increasing the EMU allowed Irish financial lenders to offer mortgages to customers at low rates. Mortgages that had been traditionally over 10% were now being offered at lower than 5%. As a result between the period of 1996-2007 house prices increase over four times. In 2007, the construction sector accounted for 13.3% of employment, well above the OECD average (See Figure 1.1) (Whelan, 2013). Irelands dependence on the construction sector would ultimately lead to Irelands economic downturn.
The collapse of Lehman brothers exposed Irelands dependence on the construction sector (O'Brien, 2013). The Irrational Exuberance in the Irish construction sector was one of the causes of the Irish recession. Prices on assets were over-inflated and banking lenders became reckless. The banking sector in Ireland had become over-exposed on its asset side of its balance sheet to domestic property and the construction sector and the liability side to EU borrowing markets (Kelly, 2009). Additional credit was created using Euro-dominated bonds and interbank borrowing for Euro area banks. This credit was then given to property developers, who invested in construction. Bank loan books in Ireland were poorly diversified and contained many risky ventures. The financial sector in Ireland increased in value more than three...

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