Two years ago Ireland’s national deficit stood at an astonishing 32 per cent of its gross domestic product. Unemployment had jumped by ten per cent in two years. Its six largest banks had been nationalised with borrowed money to prevent their collapse, and it had gone cap in hand to the International Monetary Fund for a bailout. Yet the IMF was impressed: Ireland measured the depth of its crisis accurately and did not try to hide it.
At that point, in 2010, the Irish had already endured two austerity budgets since their housing bubble burst. They have since lived through two more. Yesterday, approving the EU fiscal pact in a referendum won comfortably by Prime Minister Enda Kenny and the “yes” lobby, they voted for austerity again.
In truth they had little choice. The alternative would have been to forego a new round of EU loans on which the Irish economy depends. Dubliners did not so much welcome the result as groan, via Twitter, that it amounted to “Rock: 58 per cent; Hard Place: 42 per cent”. Even so, the vote reflected an admirable collective understanding that a small economy on its knees cannot spend its way out of trouble. It is a lesson that could have saved immeasurable heartache and suffering in Greece if absorbed there sooner, and one that Spain, for all its greater heft, should act on now.
Ireland’s humiliation started in the private sector. It was caused by uncontrolled property speculation funded by banks whose global liabilities, at the nadir of the financial crisis, stood at three times the country’s GDP. By taking on the banks’ bad debts, Brian Cowen, the former Taoiseach, shifted private pain to every taxpayer as a matter of deliberate policy. In another age the result might have been a bloody revolution. In the event it has been a quiet upheaval but an upheaval nonetheless. In both the public and private sectors, many of those lucky enough to have jobs have taken real terms pay cuts of 15 per cent over the past four years.
The rewards for Ireland’s stoicism are beginning to appear. Business confidence is higher than at any point since the banking crisis, bucking the dismal trend across southern Europe. Exports are showing signs of growth. Bank deposits are safe and growing. In short, the Irish have prescribed harsh medicine for themselves and taken it, and in the process they have shown that austerity offers a plausible path to recovery. Small wonder that Angela Merkel, the German Chancellor, not only greeted yesterday’s vote as “good news for Ireland and for Europe” but also reserved “particular recognition and respect” for the Irish people. David Cameron should thank them, too.
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The Eurozone’s fiscal pact would have been enforceable whatever the Irish result. Approval by 12 of the zone’s 17 members was enough, and had already been obtained. But the referendum, which is constitutionally required in Ireland and nowhere else, will bolster the case for fiscal sobriety in the debate on Europe’s destiny now being hammered out between Ms Merkel and France’s new Socialist presidency.
What Ireland has shown is that a financial crisis, though bloodless, can change the behaviour of ordinary consumers and mortgage borrowers if its true dimensions and implications are acknowledged. In Greece and Spain behaviour needs, likewise, to change. The Irish lesson is clear.