Danger in Oversimplifying the Decline of the Celtic Tiger

 |  Includes: EU, FXE, IRL
by: Charlie Fell

The Irish nation and its people stand on the precipice. The seemingly bottomless pit into which public monies continue to be sunk in order to rescue the banking system, combined with already-stretched finances, has raised concerns that a default by the Irish government is imminent. International investors reacted to the stream of negative news flow, and the premium for five-year Irish credit default swaps (CDS), soared to more than 420 basis points, suggesting a cumulative default probability of 34 per cent, assuming a market-convention 40 per cent recovery rate.

The market stress is plain for all to see, but the continued negativity emanating from certain corners is unhelpful, and particularly so given that much of the analysis is simply incorrect. It has been argued with some aplomb that the ten percent devaluation in 1993, following the then-government’s aborted attempt to defend the currency, was the torch that brought the ‘Celtic Tiger’ to life.

This argument is then followed by the contention that joining the euro at an overvalued rate later in the decade contributed to subpar export performance in the subsequent decade. It is this commentator’s belief that such arguments are entirely false, and if not for our commitment to the European project, it is highly probable that Irish living standards would still be languishing below the EU average.

There are several factors that coalesced to produce the extraordinary growth of the ‘Celtic Tiger’ years, though it is undoubtedly true that Ireland’s commitment to Europe played a huge part in the transformation of the economy. The sense of urgency among U.S. multinationals to establish operations in Europe increased following the Single European Act, which came into effect during the summer of 1987, and paved the way for the creation of a single market by the end of 1992. U.S. companies were provided with further impetus to move to Europe after the Maastricht Treaty in 1992, and the subsequent movement towards monetary union.

Intel (NASDAQ:INTC) arrived here in 1990 and the company’s action provided Ireland with an important selling point, which was reinforced not only by the low manufacturing tax rate and young English-speaking population, but also by the U.K.’s decision to withdraw from the exchange rate mechanism (ERM) in 1992. Almost every major U.S. technology company followed Intel’s lead, and between 1991 and 1994, Ireland attracted roughly 40 per cent of all U.S. electronics investments in Europe.

The Irish success in attracting America’s best technology companies was repeated with U.S. healthcare companies, as one by one they chose Ireland as their European home. By the early years of the new millennium, Ireland was home to 13 of the world’s top 15 pharmaceutical companies and 16 of the top 20 medical-device companies. The extraordinary accomplishment saw Ireland’s per capita stock of foreign direct investment jump to second highest in the world and double the EU average.

The timing was fortuitous, as both the U.S. technology and pharmaceutical sectors enjoyed a golden age in the mid- to late-'90s and Ireland benefitted handsomely. Irish exports expanded at a rate of almost 14 per cent a year during the 1990s, and Ireland’s share of world exports jumped from 0.64 to 1.22 per cent. It was not a modest ten percent devaluation of the currency in 1993 that precipitated this success, but undoubtedly the commitment to Europe.

The notion that Irish export performance has been decidedly poor since joining the euro is also without merit. Analysis by Proinnsias Breathnach, a senior lecturer at NIRSA, demonstrates that Ireland’s export growth rate from 2000 to 2007 was superior to that of 19 of the 29 other members of the OECD. Furthermore, the nation’s share of world exports increased over the period, a trend that persisted during the ‘great recession’, as Irish exports held up relatively well. Our share of goods exports did drop following the dotcom collapse and continued its descent as energy prices soared, but this has been easily offset by a more than doubling of our share of services exports. The idea that Ireland joined the euro at an overvalued rate is simply not supported by the evidence.

Ireland’s recent economic history is being rewritten in certain corners, and the nation’s euro adventure is being blamed for all our economic ills. This does the Irish people an extraordinary disservice and is downright dangerous in these turbulent times. Commitment to Europe propelled this nation out of the dark ages, and to argue otherwise, is simply not true. We would do well to heed the words of Charles Haddon Spurgeon, who declared in 1855 that, “A lie will go round the world while the truth is pulling its boots on.”
Disclosure: No positions