Waiting for Dough
The luck of the Irish runs out.
May 11, 2009, Vol. 14, No. 32 • By CHRISTOPHER CALDWELL
A few of the developers were young and dashing. Most of them were dissolute and lecherous-looking geriatrics. You could see them in the Irish weekend newspapers, posing in front of their huge houses and at charity balls with their toothy wives. Each of the developers had a signature Croesian excess, whether personal or professional. There was Sean Dunne, who had proposed to dynamite two of Dublin's historic hotels in leafy Ballsbridge to build a billion-dollar skyscraper; there was Sean Mulryan with his stables full of racehorses and his whole fleet of helicopters; and there was Johnny Ronan, who reportedly flew several dozen friends to Italy to have Pavarotti sing to him personally.
There is a good side to this lack of sophistication, of course. Boosters of Ireland's economy are keen to point out that there is little toxicity in its real estate market. Even harsh critics of the ruling Fianna Fáil party's economic policy--like the economics spokeswoman of the Labour party, Joan Burton--will grant this. It doesn't take an MIT doctorate to figure out what's wrong with the Irish economy, so the markets have had little trouble pricing the economy's assets. Shares in the Bank of Ireland, which were at 18.83 euros in 2007, now trade for 12 cents.
But there is a dark side to having your small economic pond fouled by only a handful of big fish: The whole social, economic, and political system looks like a con. Why, people now wonder, was so much of the financing in this supposedly open economy done by local Irish banks? The easiest answer to hand--and probably the correct one--is that the bankers and developers bought the protection and indulgence of Fianna Fáil. (The two main Irish political parties don't really have ideologies, but Fianna Fáil is the more historically nationalist and machine-oriented of the two.)
This unease has been heightened by a shocking lack of accountability. The banks' top brass has hardly changed from the days when they were actually making money. One of the few executives to resign was Sean FitzPatrick, chairman of the spectacularly reckless Anglo-Irish Bank, or "Anglo," but he was an extraordinary case. FitzPatrick got "director's loans" worth 83.3 million euros (which the bank's accountants, Ernst and Young, failed to notice) at a time when he was running the bank into the ground. Anglo peaked at 7.50 euros a share and was nationalized this year at 22 cents. When Bear Stearns collapsed, Anglo lost 23 percent of its value. When Lehman Brothers collapsed, Anglo threatened to take the whole Irish banking system with it. The government gave a blanket guarantee to Irish banks, using as security the country's National Pension Reserve Fund.
Now, imagine what the reaction has been to the discovery that the National Pensions Reserve Fund has been used to underwrite golden parachutes. This spring, Michael Fingleton, the chairman of Irish Nationwide, became the face of Irish banking malfeasance in much the way that the AIG financial team became the face of the U.S. banking scandal--and for the same reason. Fingleton's last reported salary was only 2.3 million euros. But in 2007 Irish Nationwide reported that it had transferred a 27.6-million-euro pension fund on behalf of "members" (note the plural) of the plan. Turns out the plan had only one member--Fingleton. And that money constituted 85 percent of Irish Nationwide's reported pension-fund assets at the end of 2006. Fingleton agreed to resign at the end of April. He also agreed to pay back a million-euro bonus he had received after the government had used those taxpayer pensions to secure Irish Nationwide against collapse. Rather like Barack Obama faced with AIG, the Irish finance minister, Brian Lenihan, had seen that the Fingleton bonus was a disaster in the making. He had threatened to withdraw Irish Nationwide's guarantee if Fingleton kept his bonus. This led to a funny photograph on the cover of the satirical magazine the Phoenix:
Lenihan: Return the bonus, or get the sack.
Fingleton: How much is in the sack?
REAL MONEY AND FAKE
Ireland once looked to many investors like a versatile economy, matching American dynamism with European security. But now certain commentators are warning that it might be the other way around. "Ireland is like a jockey riding two horses," said the economist and author David McWilliams in Dublin this March. "When the horses are moving together, everything works well. When they're not, the jockey can get a terrible pain in the groin."
Ordinarily, a small, export-dependent economy in which wages are becoming less competitive can regain its edge by devaluing its currency. But Ireland is in the euro, and it is having a hard time staying in. According to the European Stability and Growth Pact, all countries must keep their deficits below 3 percent of GDP. No country until recently has ever gone above 5 percent. Ireland is now at 11 percent, or 20 billion euros. The European Central Bank has given Ireland until 2013 to get back into conformity.
Two-thirds of companies surveyed by the accountants Price Waterhouse Coopers said they were planning on cutting jobs this year. Consumer spending is already down 20 percent. So the government is now faced with the need to raise taxes dramatically and cut spending in the face of a looming recession. On April 7, it announced its budget. Top tax rates have soared past 50 percent, and capital gains and value-added taxes will rise, too. A property tax will be added. And that will make only the merest dent in the 20-billion-euro shortfall.
A basic question remains, though: How, in the absence of leverage-creating derivatives and "toxicity," did a few real-estate yahoos' going broke cause the risk of sovereign default to loom over the previously solvent Irish state? In Ireland now, there is (as an American could predict) a lot of talk about how the past few years have been an era of greed, lacking in social solidarity. But in Ireland's case, this is not true in the slightest. There was plenty of care for the less well-off. It is just that the government got no credit for it because it delivered that care by lowering poor people's taxes.
The fiscal emergency had its roots in the generous-sounding "social partnership" model agreed on by the country's leading politicians in the late 1980s--a sort of Irish answer to Germany's social market economy. The key to the social partnership was assuring "competitiveness" in international markets. Irish workers wanted higher wages, but businesses wishing to locate in Ireland wanted lower ones. How do you square that circle? Through government. In return for workers' moderating wage demands, government would make sure they paid very little in income taxes. Half the income tax in Ireland is paid by people earning over 100,000 euros, and 750,000 people--a third of the workforce--pay no income tax at all. Where does the money come from, then? From transaction taxes ("stamp" duties, capital gains taxes, corporate profits tax) that were paid mostly by the real-estate speculators who were making money hand over fist. Everyone seemed content with this system, even the speculators. It is, after all, easier to tax people's fake money than their real money.
The government could thus stimulate consumption (and consumerism) through low income taxes without having to stint on entitlements. This explains how, for a while, the ruling Fianna Fáil party managed to become the party of both the upper-middle class and the working class--much as U.S. Republicans did by a superficially different but essentially similar shell game.
We can see now that this arrangement was a time bomb. We can also see that the politically connected developers did a good deal to wreck the economy. But there is no denying that, by golly, they paid a lot of taxes. All this meant, though, was that the state became just as dependent on the housing bubble as the private sector. When more money came in, the government just spent it. The featherbedding patronage state is about the only Irish tradition that the global economy did not kill. Government employees make 25 percent more than equivalently situated private employees, according to the Dublin-based Economic and Social Research Institute. Government employees got very powerful in the process. So over the winter, when politicians decided to cut public-sector pay, they weren't exactly forthright--they proposed lopping 7.5 percent off the top and called it a "pension levy."
The head of the Labour party, Eamon Gilmore, recently attacked the finance ministry on the grounds that its new, trimmed budget requires more austerity than the country at large can handle. Gilmore has called instead for an Obama-style stimulus package. This is far more difficult to pull off when you are dependent on foreign investors and don't control the currency in which your debts are denominated--but at least it promises a continuation of something-for-nothing! Unsurprisingly, Gilmore is now the most popular politician in the country.
PRISONERS OF THE OPEN ECONOMY
There is lots of unrest and anger in Ireland now, and it is finding various outlets. Government statistics envision unemployment rising to 500,000 this year (in a labor force of 2.2 million). In protest against the pension levy, 150,000 people demonstrated in Dublin in March. Police unions and parts of the armed forces have also taken to the streets, which is supposed to be illegal. A representative of the army wrote to the defense minister for reassurance that it would not be used to break strikes, although it has often been called upon to do just that. Until recently, Irish workers had little to strike about. The country's largest union body, the Irish Congress of Trade Unions, negotiated a 6 percent pay raise on the very eve of the banking collapse and some businesses are even honoring it.
Today unions are united. They are irate. Workers are having their wages cut unilaterally by the government and via negotiations with private business. You would expect upheaval. But even under the circumstances, unions' power to shake the government or win themselves a better deal appears to be meager. Ambitious plans for a national strike fizzled out when Impact, the largest public-sector union, failed to get the necessary votes.
Part of the unions' problem is that the economy is configured so that striking will do them little good. Ireland is now abjectly dependent on the global economy. Paradoxical though it may sound, this makes its workers dependent on government. The social partnership model has an iron logic. Once income tax rates fall to a certain level, Irish workers' disposable income can rise only through transfer payments. If it rises through wage increases, foreign investors will be driven off and there will be no pie to divide. So Ireland must run its economy in a two-step process: First, attract the direct investment from the global market. Then, if you think the workers deserve a better shake, use government to redistribute the income at home.
People are coming to understand how appallingly little there is to redistribute. Waterford Crystal, the mainstay of a market town that has been making glass since the 16th century, recently ran into trouble. The company employed 3,500 people in the 1980s, but under the leadership of Tony O'Reilly--ex-rugby star, ex-chairman of Heinz, ex-billionaire--it screwed things up royally. It over-manufactured items for the millennium: The public turned out not to want the year 2000 commemorated in glass. It went on an acquisition binge. The death blow was Waterford's acquisition of the German porcelain-maker Rosenthal and its tardy discovery that Rosenthal had German-sized pension-and-benefits liabilities. And then came the bad luck of the falling dollar and pound. The company wound up with 400 million euros in debts and a share price of a tenth of a cent. Waterford went into receivership; the Waterford name is now owned by KPS, a private equity company in New York.
On a Friday afternoon in January, KPS announced it would shut down manufacturing at Waterford's Kilbarry plant. Two hundred workers staged an occupation of the visitors' center, which was once ("once" meaning last year) Ireland's fourth-largest tourist attraction, getting 350,000 visitors. The occupation won widespread sympathy in the town of Waterford itself. And why shouldn't it have? Much of the town's economy--hotels and mini-museums, sweater shops and espresso bars--is configured around those foreigners who want to see how Waterford glass gets made. Local women brought meals to the factory canteen to feed the strikers, and teenagers volunteered for janitorial work.
The town will wait in vain for the plant's reopening. After an eight-week sit-in, the company offered the 800 workers left at the plant a 10-million-euro payment--1,200 euros apiece--and they jumped at it, 90 percent of them voting for the settlement. A hundred some-odd workers have been allowed to stay on for another six months. Some labor movement.
Much of the plant's production will be transferred to the Czech Republic, and there is justice in that. Waterford is indeed an ancient glassmaking city, but its name became an international eponym for beautiful crystal only after 1947, when Charles Bacik, a war refugee from Czechoslovakia, revamped the place with the help of a number of fellow Czech glassblowers. One was Miroslav Havel, who developed the beloved Lismore pattern--the one you probably registered for when you got married.
On the other hand, since the factory will remain in the town, and since all these extraordinary Irish craftsmen will, too, it is hard not to share the puzzlement of trade union rep Macdara Doyle of the ICTU that a national treasure, cultural symbol, and economic behemoth like Waterford could just evaporate this way. "What's puzzling and annoying us is this," he said in March. "If you are going to re-grow your economy, surely you have to do high-end manufacturing. We're not all going to get rich pushing strange financial products. Waterford is to Ireland what BMW is to Germany. It's by no means a busted flush."
I visited the factory with John Stenson, a 56-year-old master wedge cutter who took early retirement last year, after working at the plant for 40 years. Stenson is still owed tens of thousands out of his severance payment that he expects never to see. He apprenticed at the company for five years in the time of "Mister Havel," blowing glass and cutting it on old ceramic wheels. It was quickly apparent he was a gifted glassmaker. After three years of further training, he was certified a master, and ran his own "bench" of six artisans. He toured the United States explaining and demonstrating to Americans the craft of glass-cutting as practiced by artisans of Waterford. He handmade six serving dishes for Prince Charles. He designed, sculpted, and cut the crystal grandfather clock that is (or was) the central exhibit in the Waterford visitors' center.
"He is a man of many talents!" said one of his admiring former colleagues, also unemployed after working at the plant for decades, who had managed to get a temp job as a security guard there.
"Well, I'm on the dole now," Stenson said.
Christopher Caldwell is a senior editor at THE WEEKLY STANDARD. His book Reflections on the Revolution in Europe: Immigration, Islam