November 14, 2004

Truth about the Celtic Tiger

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Over the years, many Irish politicians, industrialists and public servants have tried, under various guises, to take credit for the Celtic Tiger.
They argued that, without their unique impact, we would still be in the economic dark ages. But the person who is really responsible doesn’t even speak English.

Dieter Niemann is in his late 30s.He lives in Cottbus in the province of Brandenburg, in what was once the German Democratic Republic. He has found it difficult to keep a steady job in recent years, which means his wife, Hannelore, has to go to Berlin to work so that Dieter junior is provided for.

But 15 years ago last Thursday, Niemann opened the Berlin Wall. As a 23-year-old conscript border guard, he misheard an order and, instead of looking for passes, lifted the barrier and more or less said to his fellow countrymen: “Off you go.”

Ireland’s economic renaissance began that night. While Helmut Kohl was talking about blooming landscapes in the east, about 1,000 miles to the west, the real beneficiaries looked on bemused.

We knew it was a momentous night, but we had no idea it would presage a huge windfall for Ireland. Indeed, all the comment at the time suggested that Germany and everything to the east would be the winners. It didn’t quite work out like that.

When the Berlin Wall fell, so too did the post-war balance in Europe. The status quo had been based on a prosperous but divided Germany, anchored diplomatically to France via an intricate web of treaties and agreements. This relationship was at the core of the EEC, the EC and then the EU.

The arrangement saw Germany, “an economic giant but apolitical pygmy” (to borrow Willy Brandt’s phrase),wedded to France, with the French wielding most of the political power.

As a consequence, most big European initiatives had a French ‘grand project’ feel about them.

The French recognised the ramifications of German unification first and, faced with the risk that a unified Germany would do its own thing, immediately sought to tether the new united Germany to Europe. The euro was the French mechanism.

The French reckoned that if they could anchor the Germans into the French sphere of influence by depriving them of their currency, they would have fewer explicit monetary ambitions in the east. The Germans obliged.

Unknown to us, this was the first in a series of victories for the Irish. Since 1979,we tried to pretend the punt was as good as a German mark and tied ourselves to the German currency via the European Monetary System.

However, nobody believed the claim and the resulting risk premium ensured Irish interest rates were always 5 or 6 per cent above German rates.

This meant any borrowing in Ireland would be at crippling interest rates and, unsurprisingly, private investment in Ireland from1979 to 1989 was never enough to curb the rise in unemployment.

Although the euro was conceived by Jacques Delors in 1989, it did not take off properly until 1995. In the interim, the Germans handed us another victory. In 1990, the German economy performed as if it were on steroids, growing rapidly and spending enormously in an effort to integrate the former communist regime.

Despite this, Irish policymakers continued in the make-believe world that the punt should appreciate with the German mark.

The sensible thing to do would have been to devalue against the Germans.

But we couldn’t entertain that, not with the presidency of the EU in 1990 – a devaluation would be neither sporting nor patriotic.

The thinly-disguised monetary machismo of trying to keep up with the mark led us to follow the German currency on the rollercoaster ride that followed reunification. As the mark soared, we tried to hang onto its coat-tails.

Worse still, when the British moved sterling into the European Monetary System, we were like a jockey trying to ride two horses: sterling – where we did most of our trade – and the mark, which paid most of our bills.

After sterling fell out of bed in autumn 1992, the markets focused on the punt.

Within days, the Irish rate of interest was up to 100 per cent. Instead of managing a dilemma, we found ourselves futilely firefighting a crisis. The Central Bank blew the country’s foreign reserves and threw in the towel in January 1993.

Although it was seen in official circles as a national humiliation, the 1993 devaluation was a godsend. The devalued exchange rate allowed Irish exporters to compete for the first time in years and exports began to soar. Interest rates fell from100 per cent to 9 per cent in four weeks and domestic investment started to stir.

As the 1990s progressed, things in Germany were not going according to plan. Eastern Germany remained comatose and the west – so long the watchword for all economic miracles – began to look fallible.

Unemployment and taxes rose to pay for the wasteland in the east. In response, Germany cut its interest rates rapidly, but the heavily-indebted unified state, the shell-shocked easterners and the wealthy but old West Germans failed to respond.

So in the late 1990s,Germany was left with billions of cheap euros looking for a home. Who would borrow all this cash?

Paddy obliged. Ireland, so long a country with too many people and not enough money, became, almost overnight, a country with far too much money and not enough people. Money and immigrants flowed in. This magic combination pushed the economy forward like never before.

The money came from Germany. Old German savers continue to lend money to young Irish consumers. The greatest irony of all this is that there are more BMWs per head in Dublin than in Munich, the home of the car giant.

So the European Monetary Union allows Gunther to lend money to Paddy, so that Paddy can buy the cars Gunther made in the first place. Quite a good deal for Gunther, don’t you think?

Low interest rates alone would not have sparked the economy. There had to be something else – people. The fall of the Berlin Wall opened up huge emigration opportunities for eastern Europeans and they have come to Ireland in their thousands.

Immigration has driven the productivity of this economy in every sector from software and restaurants to construction and farming. Without these people, the economy would have stalled and prices would be even higher than they are now.

There may be a cautionary immigration lesson here, also courtesy of Germany. In the late 1960s, West Germany ran out of workers and decided to fuel the economy further with cheap labour from Turkey.

Over two million Turks arrived and, although welcomed for economic reasons at the time, economists forgot that Germany once asked for workers and what it got was people – very different people. It is highly likely that this experience will be repeated in Ireland in 20 years but, for the moment, the immigrants are a huge boost.

So the man who started all this was Niemann. And as he sits, unemployed, in his soulless flat in rundown Brandenburg, possibly lamenting the falling of the Berlin Wall 15 years ago, we should raise a glass to him. For it was his actions, not those of Irish politicians, that first stirred the Tiger all those years ago. 

  1. cathal hipwell

    Hi david, my name is cathal hipwell, a student doing a
    masters in E-commerce in ucc. just read the article and i
    taught it was great. there has been so many explanations
    going around about how the celtic tiger actually got
    started from our “attractive tax system to multinationals”
    to the foretaught of politicions in implementing policies
    that laid the seeds of sucess and you have just broke it
    down for us and might i add with some humour aswell of how
    it all got started, “a fluch”, or a series of occurances
    that paddy had nothing to do with. But hey we’ll take it ,
    we suffered long enough, so i suppose when were driving
    along in our bmw’s, going on our 3 holidays a year, making
    sure the apartment in spain is being looked after during
    the winter, we should think about all the peolple who laid
    the seeds for the celtic tiger—the west germans,the
    communist east germans, the former Soviet union, the french,
    the usa( for there influence in bringing down the berlin
    wall) oh and ya man aswell, ive forgotten his name, i think
    its hermat or something. Maybe we could get him fixed up
    with a job in ireland afterall i think he deserves it.
    Keep up the good work.

  2. Christian

    Nice angle, great story. Love to think life would be so
    simple as it is in hindsight.

    God Bless the “Hiberno Tiger”

    Most pressient now is the crazy fanner of flames is, Land &
    The Right of Private Property to dictate social life.

    I run my own business, small and entirely humble. Compared
    to the well oiled commercial machines out their I am

    I had a interesting debate with a fellow business owner, we
    are most like minded & run small shops but he streanuously
    believed that its important to have private property as it
    creates wealth.

    Does it really.

    Land only creates wealth when you own as much as you can and
    you horde it. Simple as that.

    Its important to remember that one of the biggest industries
    & driver of economic commerce & demand, Microsoft.
    Essentially started from a suburbann garage, as did Apple.

    Rock n’Roll

    I doubt these people ever had to rent the space from their

    Imagine if they had all those overheads and meeting with
    bank managers, creditors, landlords etc. etc. during there
    start up/teen years…

    I could take you on a 1 weeks journey around Dublin alone
    and show you the waste and wasted oppurtunities belying this
    land we stand on. Irelands creative edge & sustainability
    potential is being destroyed by monoculturalism. Its a
    dangerous path to go down in nature and leads to ultimate
    failure in organisims (Indian alone has 40,000 varities of
    rice, If Uncle Ben had his way we’d all be eating stogy
    white crap untill the first crop failure whipes out the
    entire lot and then what!! Anyone for a potatoe… now that
    takes me back 150 years….)

    Is it not ironic and telling that a entire block of 37
    apartments & 4 retail units is forsale as an “investment
    oppurtunity”, in Dublin City Centre is right opposite Focus,
    an orginization set up with its agenda squarely aimed at a
    right for a right to housing for all.

    I kid you not, I feel like I am living in one badly told
    joke where the punch line is still waiting to be revealed!?

    Who in their right mind would buy such a massive and truly
    unremarkable property in a market about to reach decline.

    Of course there is no option for any of the tenants to buy
    there own apartment.


  3. adrian

    Waiting for favourable economic conditions is like waiting
    for a dublin bus and yip David it sure happened to us in
    the 90s. The buses showed up at last. The concern is that
    we might be waiting a while for the next one and its
    starting to rain and god love to the wee paddy whose
    looking at the back of that last bus pull out while being
    drenched by a passing beemer.

    Ireland suffered geographically pre 90s – manufacturing was
    where it was at and we were not at the races being an
    island without the population of a decent city.

    Through the 90s and 00s there was more fast money in
    services & the smart industries and we could compete like
    no other with your J.P.s hungry and smartly educated weans.

    The weans are a wee bit fat around the middle and to
    economically grow we need some new thinner ones but they
    have to be clever.
    Costs are too pricey here for cheap-end production.

    (Workers from the far reaches of eastern europe and beyond
    will undoubtedly arrive and fill some of the existing lower
    end jobs and this will be a gradual process as the next
    spoilt generation kicks in. They will be too snooty to get
    their hands dirty!).
    For me Ireland has already maxed out on smart end growth.
    The govt is encouraging in smart people with tax breaks for
    researchers but George Bush and his team of economic rocket
    scientists have tax amnesties in the pipeline on the other
    side of the pond which may send a few jobs back stateside.
    (At the same time I note that he’s busy exporting surplus
    paddies presumably to create jobs for his wonderfully
    clever electorate!)
    In the fullness of time as is human nature the spoilt
    generation shall be lazy and the children of the immigrants
    shall be the shakers and movers. Did you see Samantha Mumba
    on the Late Late?

  4. Bertie the born again socialist

    German money inflated our property bubble and made rich
    people feel richer, it was this and low corporation tax
    related money that built our economy.

    The question is, where do we go now both the property
    market and tax competetion are facing turbulent times ?

    Cowan is wondering what to do … any suggestions ?

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