July 26, 2006

Why our life in the fast lane can't stop without skidding

Posted in Celtic Tiger ·

Quite how the world’s fastest growing economy can slow down rapidly without any collateral damage is beyond me.

Yet that appears to be the Panglossian conclusion of yesterday’s ESRI report. The report – from the generally accurate institute – predicts the end of the thirteen year economic cycle which has transformed our society. If it is right, the ramifications of the ESRI’s musings are profound and will reverberate throughout our political system and beyond.

In the first place, it is extremely rare for economies to change gear so quickly. When you go from a hi-octane fifth gear down to first, the engine, suspension and carburettor tend to hurt. Everything rattles. We have economic examples from Europe, the US and Asia and the one unifying thread in all these instances was that the political status quo did not survive the impact of the slowdown. In most instances, to quote Yeats, “the centre cannot hold”.

In our case, we will be dealing with a debt hangover of monumental proportions in the face of rising interest rates. We will also be coming to terms with a profoundly different country, where ten per cent of the population overall and a much higher percentage of the work force, will be foreign. We will also be challenged by higher energy prices and we will be net, and probably significant, contributors to the EU.

What will we have to show for thirteen years of plenty? Amazingly, we will still not have a motorway between our two main cities! Nor any link road down the west coast of the country. It will still be impossible to go from Cork to Galway – our second and third cities – by train! I could go on, but you get the point. It will be difficult not to look back and conclude that many opportunities were missed.

When the economy slows, the first thing to give is the government’s finances. Given the sloppy management of the receipts of the boom, few would argue against the suggestion that our budget deficit could explode as a weak government balks at cutting spending. This means higher taxes in the next few years. Obvious and significant tax hikes are something that we have not experienced for close to a generation.

Unemployment will also rise. This again is something we have not seen since the late 1980s. If other countries’ experience and economic history are repeated here, this will lead to a clash between Irish workers and the new immigrants. The new immigrants are likely to accept lower wages to preserve their jobs which would lead to Irish ferries style displacement. This will happen all over the country in shops, bars, truck cabs, building sites, hotels and anywhere that the jobs are manual. The history of immigration is the history of displacement and the next few years could see this happening on a large scale in Ireland.

The impact will be different for different generations. The older generation – the Jagger Generation- who built up huge equity in their houses during the boom years, might feasibly have a sufficient cushion to ride the downturn. In contrast, the under thirty fives – the Pope’s Children – will be in trouble because not only will the inflated prices of their recently bought houses be falling but the rise in unemployment will affect them most. In addition, they are the ones who are carrying the huge debts following years of conspicuous consumption trying to keep up with the Smurfits.

What about the Bebo Generation – our under twenties and the teenagers leaving school now? There is little doubt that the boom has given these younger people inflated expectations and beyond that which a faltering economy can deliver. When inflated expectations get punctured by a fragile economy, entire generations suffer. If you doubt this, examine the strange metamorphosis in Japanese youth who, over the past decade, lived through their slump following the bursting of their property bubble.

Typically, when a society goes through such convulsions, people look for someone to blame. The two most likely targets will be outsiders. First, immigrants are likely to be the scapegoats, particularly if we continue with an immigration policy that many people see as an open door.

However, an equally significant target is likely to be the remote institution of the EU. Our European commitment has always been skin-deep, based more on economic opportunism rather than some common tragic history which has had a searing effect on the collective memory. We are much closer to the Anglo-American world in terms of language, culture and influences. Our European infatuation was maintained by the free lunch of structural funds and the early years of the CAP. Over time and coincident with the money running out, we have proved in referendum after referendum to be lukewarm Europeans.

Now imagine the following scenario. Ireland’s house prices are falling in tandem with the forecast slowing economy. We need lower interest rates. But the European Central Bank is putting interest rates up. Every half point rate hike tightens the noose further on Ireland’s indebted middle class. Equally, the advent of Romania and Bulgaria into the Union leads to a second large-scale influx of immigrants chasing the same Irish Dream that prompted the Poles, Lithuanians and Latvians to move here in the past five years. In addition, as these poor countries join, rich Ireland has to give more cash to the EU budget to pay for Romanian farmers’ produce that nobody wants.

It is not difficult to see how an anti-European politician could emerge who might just fan these embers putting himself forward as a saviour of the “real Irish” in the face of threats from Brussels. He could offer short-term fixes like pulling out of the EU or Euro, stop immigration and get tough on illegal aliens. This could be plausible. And when distressed people want a politician to be seen to “do something”, nationalism, scapegoats and chauvinism are never far away. The EU would be such an easy target because it is remote, its champions appear to come from a rarified, educated elite that can quote Balzac but can’t tell you who the Duffer plays for. They talk the language of post-1945 solidarity which means nothing to an Irish generation who, apart from owning a worthless apartment in Bulgaria, have little to do with Europe.

The evidence from recent votes on Europe suggests that even at the height of the boom, our love affair with Europe was beginning to go sour. Think about how easy it would be for a nationalist politician to point the finger at Brussels and Frankfurt in the event of the type of slowdown the ESRI is forecasting or worse.

If the past thirteen years of the boom have taught us anything, it is that anything can happen. And we should always be prepared to think the unthinkable; not to do so leaves us vulnerable to nasty surprises, and no one likes them, do they?

  1. John

    Thank you Fianna Fail!

  2. John

    Ireland is just 1% of the EU,we need them a lot more than
    they need us and if we dont need them we do need somebody.
    Ireland as of yet has never proved it can stand on its own
    two feet economically as a nation.
    The EU has been constantly warning Ireland about its
    economic future and we’ve constantly been giving them the
    two fingers through our inaction.when Ireland first
    rejected enlargement of the EU our actions were then
    described by an English journalist as “the arrogant swagger
    of the nouveux rich”.
    I agree that when the economy goes into a dive that our
    recent immigrants will not leave,they will have the most
    secure jobs doing essential services with no debt to worry
    about and lots of cheap rental accomadation.Even if the
    Irish did want their old jobs back they simply could not
    afford to take them what with their massive mortgages and
    overdrafts to be paid.
    In fact what we could see is the recent immigrants buying
    up all the repossesed/vacant properties at knock down
    prices,wouldnt that be a real slap in the face for the
    nouvuex rich.
    I belive Ireland is in for some serious social changes and
    not just economic ones.

    David,I enjoy reading your articles,keep up the good work.

  3. James Murphy

    I think one of the big losers in the event of a slowdown
    will be the investment in R&D which the government has been
    harping on about so much in the last year. In the ensuing
    panic, funds for agencies such as Science Foundation Ireland
    (SFI) and Enterprise Ireland will be dramatically curtailed,
    resulting in the stifling of any innovation that might have
    been in the works. Alas this shortsightedness will be
    another body blow to Ireland inc.

  4. SpinstaSista

    John, I think reposessions would be a worst case scenario
    but the first properties to be reposessed will not be
    those of the nouveau riche, but those of struggling
    couples or singles who bought modest properties in
    Dulchieland (sorry David) at extortionate prices. Some
    immigrants are used to living at far higher densities than
    Irish people so you could see Dulchie tenements with up to
    20 non-Irish owner occupiers living in a 3 or 4 bedroom
    house. Every cloud has a silver lining – this might stop
    property prices from falling too much. However, with a
    return to tenement style high-density living, our health
    service had better gear itself up for new strains of old
    friends such as cholera, typhoid and tuberculosis not to
    mention rickets.

  5. Finbarr

    Is the government really that much to blame. Would anyone
    else have done a better job in this time? Naive to think
    so! McCreevey was excellent for Ireland – Ask any business
    owner of any size. Their biggest mistake was not
    restructuring the health service so as its management
    can’t continuously stand it the way of its overhaul and
    Irish people will always look for scapegoats. In Dublin
    they used to blame the culchies for their woes, now it’s
    the refugees or immigrants, the government et al.
    Our society has changed now, those who will survive best
    will be those who embrace and adapt to this. Expect ‘Irish
    communities’ to step up to the plate with full resistance
    to change from trade unions fuelling the xenophobic and
    the inherently lazy.

  6. Niall Kelleher

    Its hard to differentiate between the economist and the
    entertainer sometimes David – but its certainly a
    diverting viewpoint!

  7. Jonathan Benson

    Isn’t it ironic that all of a sudden Noel Dempsey has
    suddenly denounced property speculators for driving the
    price of property up. Now that interest rates are on the
    rise and people begin to feel the pain there is going to be
    a whole new round of finger pointing. Never mind the fact
    that speculation has been driving the prices up for the
    last 8 or more years.
    This “finger pointing” is just the tip of the iceberg.
    Hyper-expensive building contractors & people lodging
    planning appeals will be blamed for the slow roll-out of
    infrastructure. Consultants will be blamed for blocking
    health service reform. American will be blamed for making
    us to comsumerist and greedy and Europe for making us
    apathetic. I pity the immigrants (who we be blamed for
    anything that comes to mind) and those who will have to
    compete against them for economic survival.
    2007 will be the year the wheels fall off the economic
    wagon which will skid inexorably off the road. In 2008 we
    will be standing there in a ditch next to the wreck
    wondering how we got there.

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