Irish Crisis: Origins and Resolution

Abstract

The Celtic Tiger years in the 1990s saw the standard of living in Ireland converge rapidly to the EU15 average. However, in the middle 2000s the rapid growth continued and demand rose well above potential output, driven by a property market bubble. Either appropriate fiscal policy or appropriate financial regulation could have prevented the ensuing crisis.

The management of the crisis after 2008 and the economic turnaround, which began in 2012, was reasonably successful. There was initially a period of very severe fiscal tightening, which brought the crisis in the public finances under control. Also, pre-emptive action by the government in building up liquid assets in 2008 and 2009 facilitated management of the crisis, though it did not obviate the need for extensive liquidity support through a bail-out programme.

While the tradable sector of the economy suffered from the boom and bust cycle it still survived reasonably intact. As a result, once the fiscal adjustment was completed, and with a return to world growth, the economy bounced back. The rapid recovery has been facilitated by the low interest rate environment and the fall in oil prices. While some of the lost ground as a result of the crisis will be made up, undoubtedly there will be a permanent loss of output as a result of the very severe crisis.