The Magazine

Waiting for Dough

The luck of the Irish runs out.

May 11, 2009, Vol. 14, No. 32 • By CHRISTOPHER CALDWELL
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The Celtic Tiger was partly the result of global economic conditions and partly the result of the country's policies. Ireland's decision to join the euro in the 1990s forced it to eliminate its chronic budget deficits and gave it the windfall of super-low interest rates, set for a European economy dragged down by Germany's struggles with reunification. Ireland offered a low-cost English-speaking labor force at a time when U.S. high-tech companies were looking for a springboard into European markets. Even today, Ireland is highly dependent on U.S. corporations, which account, directly or indirectly, for 300,000 jobs. Should the United States go protectionist, or should it inflate, which for Ireland's purposes would amount to the same thing, Ireland would be in trouble. On his St. Patrick's Day visit to Washington, D.C., the Irish taoiseach (prime minister), Brian Cowen, is said to have received an assurance from Barack Obama that the president didn't see Ireland as a tax haven.

This makes Ireland sound like a northern equivalent of a maquiladora economy, like Mexico in the years immediately after NAFTA. The Irish are sensitive about this imputation. "Our natural resource is brainpower," says one Dublin personnel consultant. That is true enough. It is probably not a coincidence that the biggest beneficiaries of the Celtic Tiger were the first generation of Irish born after the institution of universal public education in the 1960s. But education is not a commodity that can be monopolized. As labor costs have risen (by a third in real terms in the past decade), international companies have discovered that there are other, cheaper workforces that can also perform new-economy tasks. Jobs have left for Latin America, southeast Asia, and Eastern Europe. That Arklow breast-enhancement business wound up in Costa Rica.

So how has Ireland continued to grow at staggering rates for the last decade? Mostly thanks to a housing bubble, which was like the American one on steroids. Run-of-the-mill three-bedroom houses in provincial towns were selling for 1.5 million euros. Prices in Dublin were up to seven times as high as in similar U.S. urban markets.

There seemed to be good fundamental reasons for a steep rise in house prices, starting with a rate of home-ownership that approached 80 percent. On top of that there was immigration, the return of Irish exiles, a growing demand for vacation homes, and the new phenomenon of widespread divorce (making two homes necessary where one used to suffice). There were also government incentives for real estate developers and for the building of vacation homes in depressed areas. The most glamorous part of new, swingin' Ireland was deeply implicated in this speculation. Harry Crosbie, real estate-and-rock-music mogul, conceived--and, stranger yet, got financing for--a billion-euro construction project along the River Liffey. It would have included two skyscrapers, including a "U2 Tower," in which the band had invested heavily, and an Ozymandian 15-story sculpture of a giant man overlooking the Liffey. It was a narrow escape for Dublin architecture when Crosbie abandoned the project for lack of funds.

The result of the bubble was that, by the time of the U.S. subprime collapse, Ireland already had as many as 100,000 vacant houses. It also has empty golf courses, empty hotels, and empty shopping malls. Every last developable acre in the country, it seems, has been bought up (and bid up) by speculators. The bad loans attached to this overbuilding might reach 20 billion euros, or 10 percent of GDP. Housing prices are predicted to drop 50 percent from their peak, and development land 70 percent. Alan Ahearne, a former U.S. Federal Reserve economist who is now an adviser to the Irish finance minister, predicted over the winter that, "with possibly one exception, this country will record the largest cumulative drop in national income in an advanced economy since the Second World War."


The villains of Irish finance, unlike those in New York and the City of London, were not wizards deploying the Black-Scholes equation or the Gaussian copula to turn the dross of subprime real estate into the fool's gold of CDOs. Far from it. They were just go-get-'em businessmen who started to believe their own blarney, cross-collateralized their properties, and got in way over their heads. As the financial journalist Tom McGurk put it: "Were you to gather together all of the senior principals in the six banks and building societies that approved this outrageous behavior, and join them to the property speculators to whom they loaned the billions, they would hardly fill a good-sized bus."