Irish Economic Meltdown

Ireland economy’s phenomenal growth during 1993 to 2007 (also known as “Celtic Tiger”) was largely based on the success of the economic model driven by factors such as banks providing cheap credit, low cost base, educated work force etc. With Ireland’s entry to European Union (EU), many foreign companies established their businesses in the country. In a bid to promote foreign inflows, Irish Government introduced favourable tax structure for international transfer pricing, liberal taxation policy etc. Irish wages grew 5 times faster as compared to that of European Union from 1997 to 2007. New banking model introduced by the government by the name “originate to distribute” (a process that allows banks to increase their lending base without violating the government norms. The banks in this model make loans and do not hold them, but lend them to other financial institutions as securitised asset package.) increased the liquidity of banks to a record level. By the introduction of subsidies and investment capital, Ireland was able to attract companies like Microsoft, Dell, and Intel to the Irish market. Approximately 14000 jobs were created in Finance, law and accounting fields in 1990s. Export-driven industries, such as software, medical devices, biotechnology and real estate were the key drivers of the Ireland economy before the crisis. Industrial peace, trouble-less relationship with the nations etc, all was resulting in a new positive attitude and economic growth in the country.
The dream run ended n 2008, when country faced economic meltdown due to the various factors such as overspending by Government, loose taxation policy, high dependency on real estate and construction industry, and blanket guarantee provided by all banks. The country’s GDP growth rate started falling drastically since 2008. Ireland’s GDP growth was 6% in 2007 to 1.6% in 2008, -3% in 2009 and -8% in 2010 so far. Easy regulations framework of the government had led to high lending to the real estate and construction sector. The demand for real estate was on the peak in 2006, when the economy shifted away from manufacturing to services and real estate. After the global recession of 2008-09, domestic demand fell by 16 percent, investment collapsed by over 40 percent, and housing prices plunged 30 percent. Investors started backing out from the real estate and construction projects as they started seeing Ireland as a country with huge lending risk. Due to this, developers and other related firms in real estate industry began to fall behind on their loan repayments and started losing money which led to record bank losses. The fall in the tax rich activities such as demand for housing and real estate caused major drop in tax revenue.
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