For over 50 years I have had the pleasure of visiting Ireland on a regular basis, taking advantage of family events (e.g. marriage to a Dubliner), invitations to lecture and a most hospitable populace to follow a case study in economic growth and business cycles.
That case study covers the emergence of the "Celtic Tiger" in the 1980s (discussed in my 2003 paper "Why Ireland Boomed") as well as the subsequent property investment mania that ended in an equally massive crash in 2008.
A recent 10-day visit helped to document the impressive recovery the country has made over the past three years, thanks to a tough, disciplined austerity program, an €84 billion bailout package from fellow European Union members, and a grudging acceptance of the fact by most Irish that Ireland had brought its most recent "troubles" upon itself. Recovery meant swallowing some very tough medicine.
THE IRISH ECONOMY: 2008-2016
As the chart above demonstrates, the Irish economy fell out of bed in 2008-09, led by a precipitous fall in housing-related investment. Unemployment in 2012 rose to 15%. A massive bailout of errant banks was undertaken, underwritten by the European Union. In response, government spending was slashed in nearly every category. Taxes were raised to reduce the amount of borrowing needed. Civil service pay and pensions were cut. As one analysis in 2013 summarized the program:
Public sector pay has been cut by significant amounts, income taxes and VAT rates have been raised, non-welfare current spending has been cut back and capital spending has been slashed . . . budgets have implemented a total amount of discretionary tax increases and spending cuts of €28.8 billion. These in adjustments are the equivalent of 18 percent of 2012's level of GDP . . . and represent one of the largest budgetary adjustments seen anywhere in the advanced economic world in modern times.
With 6% growth likely in 2015, the Irish economy is now growing faster than any other European economy and twice as fast as the United States. You can see and feel the recovery in Dublin, where business types are cheerful, airport traffic is setting records and foreclosed properties are being sold at pleasantly higher prices (although still below their boom peaks).
In travelling to other parts of the Emerald Isle, the hangover from the real estate bubble is still present in many places. The unemployment rate is still unsatisfactory at over 9%. But visits and spending by visitors are running well ahead of a year ago and automobile registrations are extremely strong. U.S. internet startups continue to establish European headquarters in the country. The central bank forecast for growth next year is on the order of 5%.
Ireland's recovery is a flat repudiation of the spend and borrow policies advocated by Paul Krugman and others who aggressively attack "austerity" programs whenever and wherever they are proposed. Note the four year decline (2009-12) in "government consumption" in the chart above. Krugman is now reduced to conceding that Ireland's recent performance is successful, but "only in a relative sense." His reasoning is backed by "a textbook Keynesian model" that for some reason has been put forward only now, after the race has been run.
With a spring election in the offing, the government has come up with a budget that loosens the purse strings a little bit for most everybody. Let's hope that the current government's hard-won fiscal credibility for Europe's "comeback kid" over the past several years is not eroded by trying to buy a majority in the Dail (parliament).