The Celtic tiger's feeling caged in
Ireland struggles with EU rules amid recession
DUBLIN - 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 and ushered in an unprecedented era of 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 the country'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. Yet 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 their ability 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 one in the United States.
"The structural problems in the United States are on an order of magnitude less than in Europe," said Constantin Gurdgiev, research director of NCB Stockbrokers in Dublin. "Ireland is now the litmus test for the European model."
European leaders will converge in Washington tomorrow for a global economic summit. 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 is set to shrink by 1 percent in 2009, the 27 EU nations may contract by an average of 1.4 percent, said Tom Mayer, chief economist for 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.
The country had emerged as a beacon for foreign companies - particularly those in the United States - 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 by offering companies lucrative incentives and among 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, house prices in some areas 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. "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."
Part of the problem is that 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 Ireland, contributing to a massive credit bubble that has all but collapsed.
Now that Ireland needs aggressively low interest rates to stimulate the 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 Federal Reserve's benchmark. That, economists say, makes sense for euro zone countries such as France, which is not in recession, but not for Ireland.
Few in Ireland talk about abandoning the euro, credited with preventing the runs seen in recent weeks in nations, including Iceland and Denmark, that kept their own currencies. But many here concede the euro is also working against a quick recovery. The relatively expensive currency has driven up the cost of doing business in Ireland.
"It's great to be part of the club when everything is going well," said Mark Doyle, of Green Isle Foods. "There is no other way for us to prosper other than inside the European Union, but we have to make sure that we are looking out for Irish interests, even when they might diverge from Europe's." 