of this was proven correct: the guarantee seriously damaged the country’s credit-worthiness, to the extent that the saved banks almost sank our entire economy. As a direct result of the guarantee, Ireland ended up committing up to €64 billion for bank recapitalisation, we were locked out of the financial markets, and we wound up in a bailout programme that deprived us of our hard-won fiscal sovereignty for three long years.
The bank guarantee did not by itself cause Ireland’s recession, but it certainly added to it. It led directly to the worst economic crisis Ireland had ever faced. The country was now stuck with it.
CHAPTER 2
IRELAND IN RECEIVERSHIP
At the time of the bank guarantee, Ireland was already in recession. By September 2008, the Irish economy had shrunk for two successive quarters and 80,000 jobs had been lost in the previous twelve months. The economy was collapsing. The complex international financial crisis, which had already taken down the Northern Rock bank in the UK and Lehman Brothers in the United States, played its part. But the main domestic cause of the collapse of Ireland’s ‘Celtic Tiger’ economy was more concrete – literally.
The ‘Rainbow’ Government of Fine Gael, Labour and Democratic Left was in power from 1994 to 1997, led respectively by John Bruton, Dick Spring and Proinsias de Rossa. I served as Minister of State for the Marine in that Government. With Ruairí Quinn as Minister for Finance, the public finances were back in surplus for the first time in decades; new jobs were being created at a rate of 1,000 per week and an era of economic prosperity was about to take off, led by export growth.
For most of the 1997 campaign, it was widely expected that the Rainbow Coalition would be re-elected. The three parties had agreed to run on prudent, steady policies. Opinion polls were in our favour, approval ratings were strong and the mood on the canvass was positive. Then, in the final week, in a desperate bid for support and power at any cost, Fianna Fáil promised tax reductions. The Independent Media Group weighed in to support Fianna Fáil, with an Irish Independent editorial proclaiming ‘It’s Pay Back Time.’
The Rainbow lost, and though no one would have predicted it at the time, Fianna Fáil went on to hold power for fourteen years, winning the next two general elections with further promises of tax breaks and increased spending. House prices had already begun to rise in 1997, but instead of managing an increased supply of new homes, Fianna Fáil drove a decade of frenzied speculative construction, which created the property bubble and, in turn, caused the economic crash in 2008. Developers were incentivised to build through a range of tax breaks. Local planning authorities, who were normally cautious and careful about their responsibility to the built environment and to communities, were incentivised to re-zone more land for building and to grant more planning permissions. Under a new Planning Act, both city and county councils could now generate additional income through new development levies attached to planning permissions.
To stimulate demand, elaborate tax incentive schemes for investment in apartments, nursing homes, holiday homes, car parks, student accommodation and office buildings were concocted. A landlord, who bought a single investment property in say, Carrick-on-Shannon, could get tax relief on his or her entire rental portfolio in Dublin. At the peak, the State was committing about €8 billion per annum in tax subsidies to construction. To drive it even further, Finance Minister Charlie McCreevy announced a plan to ‘de-centralise’ the public service, which would deliver reliable State tenants for office developers throughout the country.
To entice more buyers into the property market, cheap finance was needed, so the traditionally cautious banks were introduced to the concept of ‘light touch regulation’, and soon began competing aggressively with each other for new speculative business. Some stockbrokers and commentators cheered it on demanding that the other banks deliver the same kind of profits as Anglo Irish Bank. And the newspaper industry itself had a vested interest in the frenzy. They were doing very well from property advertising.
In my own constituency of Dun Laoghaire, the Council was required (under the new Planning Act) to draw up a housing strategy to meet house building targets set by the Department of the Environment. The strategy resulted in a stated need to increase housing units by 50 per cent in a county which was already well stocked. This necessitated additional re-zoning of land – including, for example, the lands of Dun Laoghaire Golf Club on Glenageary Road, which then moved to a new course at Ballyman on the Wicklow border. When a majority of the elected Council sought to challenge this particular instance of over development, they were met with an ‘instruction’ from the Fianna Fáil Environment Minister, Martin Cullen, and the re-zoning went ahead.
The Labour Party was consistently critical of the way Fianna Fáil pursued inflationary policies in the property market in those years. Following the merger of Democratic Left and Labour in 1998, the then leader Ruairí Quinn appointed me as Party Spokesperson on Environment and Local Government, with a specific mandate to address the problem of rising house prices and affordability. In early 1999, I established a Housing Commission, chaired by Dr P.J. Drudy, Professor of Economics at Trinity College, Dublin. This Commission produced a report that acknowledged the need to increase housing supply to serve a growing economy and population, but warned against incentivising property speculation and excessive lending. It included a comprehensive set of recommendations to address the housing problem. These were dismissed as ‘communistic’ by the Progressive Democrat Housing Minister, Robert Molloy. Charlie McCreevy’s answer to critics of his Government’s economic policy was to encourage people to ‘party on’. In a similar vein, as late as 2007, Taoiseach Bertie Ahern wondered aloud why those who were negative about the economy did not just go and ‘commit suicide’.
It was generally accepted that housing output needed to be around 50,000 units per annum, but at the peak in 2006/7, over 90,000 units were being completed. This was clearly unsustainable, as were average prices of €350,000 for a second-hand home – almost ten times the average industrial wage. And despite the wishful thinking that there might be a ‘soft-landing’, the property crash came forcefully and suddenly in early 2008. House prices dropped rapidly. By the end of 2010, they had fallen 40 per cent from peak. Many young families found themselves with mortgage debt considerably greater than the value of their properties. Builders were stranded on sites which would not now realise their costs, and with assets no longer covering their borrowings from banks.
The construction sector, which, at its peak in 2006, represented 23 per cent of GDP, was now in free fall and the wider economy was being dragged down with it. Sites were closing; construction workers were being laid off; builders’ providers, architects and conveyancing solicitors were among the first to be hit. House completions declined by 80 per cent between 2007 and 2010, taking 7.5 per cent off the country’s GDP. Real GDP fell by 3.5 per cent in 2008 and 7.6 per cent in 2009. By the end of 2010, GDP had fallen 15 per cent in just three years. As the economy shrank, purse strings tightened. Domestic spending dropped, such that the Central Statistics Office reported in 2009 the largest annual fall in retail sales since 1975. New car sales fell by two thirds in 2009.
As job losses mounted and unemployment soared, our Spokesperson on Enterprise, Willie Penrose, highlighted the unprecedented nature of the crisis numerically. The year-on-year increase in the live register was 146,000 in February 2009; 36,500 in the month of January alone. By April there were 200,000 more on the register than at the time of the 2007 General Election. Soon job losses were experienced in sectors unrelated to construction. In the first few months of 2009, redundancies were announced in Ericsson (300), SR Technics (1,200), Ryanair (200), LR Donnelly in Limerick (470) as well as Bulmers in Clonmel, Waterford Crystal, Elan, Dell, Schering Plough and Acuman. By the end of 2010, the live register had climbed to 13.4 per cent and was heading for half a million. We could see small and medium businesses closing in unprecedented numbers all around the country. This was very clearly the worst economic crisis in the ninety-year history of our State. No job was secure and no business safe.
Next, the State’s finances felt the impact.
