Truth about the Celtic Tiger

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.