We are now long past the point at which the analysis of the present crisis in Ireland has to switch from focusing purely on the economy and the banking and property sectors to focus on the underlying Irish economic model.

To date, what has emerged in Ireland is analysis that tells a relatively straightforward story which runs thus.  Ireland’s economic peril is part of a global economic downturn caused by the creation of a sub-prime mortgage crisis in the US that triggered an international credit crunch leading to an international banking crisis.  This crisis has been exacerbated in Ireland by a switch from an export-led economy to a property-led economy in the early 2000s, with the banks competing to over-lend to developers as land and property prices spiralled ever upwards, with the government and financial regulators doing little to intervene in poor banking practices.  As the property bubble burst, the over-exposure of the banks became apparent and the resulting crisis led to a contraction in the wider economy with the drying up credit, markets and tax, leading to a huge hole in the public purse, rising unemployment, collapsing house prices, and so on.  In other words, the story is one of, on the one hand, an unfortunate trigger that was beyond Ireland’s control (the global crisis), and on the other, poor economic management.

There are two main problems with this story.  First, it assumes that the principles underpinning Ireland’s economy are fundamentally sound; the failure has been simply in the application and management of the economy.  Second, the analysis simply describes how the crisis has played out, but fails to acknowledge the role of Ireland’s economic model in how Ireland’s economy is constituted and functions.  Indeed, there has been very little focus on Ireland’s much fated economic model that drove the Celtic Tiger phenomenon; a model that until recently was promoted around the world as the panacea for developing and struggling economies.  In fact, from reading or listening to most of the analysis in the media one would get the impression that Ireland’s economic model is beyond question; rather what is needed is a set of policies that will get that same model back on track.  The result is a belief that one can simply understand the crisis by focusing on the application of the model, without examining the shortcomings of the model.  As a consequence, analysis tends to be all surface, with solutions that tweak and manage, rather than delving under the surface to examine and explain how the Celtic Tiger model is itself responsible for the mess Ireland finds itself in.  This inevitably gets us beyond economic description and into politics, political economy and policy.

The Irish economic model of the Celtic Tiger years effectively married two models of political economy, American neoliberalism and European social welfarism, positioning Ireland – as summarised by one of its chief proponents, Mary Harney – as between Boston and Berlin.  On the neoliberal side, policies promote a free market orientation, the privatisation of public services, the development of public-private partnerships, laissez-faire planning, low corporate and individual taxation, and light-to-no regulation.  These are tempered by the social welfarist policies of a developmental state, social partnership, a welfare safety net, high indirect taxes, EU directives and obligations.

This model is dependent on high growth and consumption (fuelled by expanded earnings and in the Irish case by over-extended credit) to function optimally given it is underpinned by low direct and high indirect taxes.  If growth stops and/or consumption drops then a significant hole starts to appear in the tax base and national borrowing has to fill the gap.  And for all intents and purposes the present crisis is now a taxation crisis – a huge chunk of the public purse was funded by stamp duty, VAT and capital gains tax that has all but evaporated.  It is for this reason that the model has proven to be unsustainable.  Even without the global downturn, given the model is predicated on constant, sustained growth and a shallow tax base it was always going to run into difficulties at some point given the ebb and flow of economies.

What that means is, the mess Ireland finds itself is not simply a banking and property crisis – that is one visible manifestation – it is a crisis of the underlying economic model that has too narrow a tax base, too little regulation or active management, too much focus on individual wealth, too much privatisation of public goods, and too much general myopia as to the problem we were sleep-walking into.  The evidence is all around us – the massive growth in national borrowing to plug the hole in the public sector purse, the indebtedness of our citizens, the collapse of social partnership, growing unemployment, businesses shrinking or collapsing altogether, cutbacks in public sector pay, and so on.

The solution is not simply to sort out the banking and property sector and revive the same economic model that left us vulnerable to any economic slowdown, it is to revisit the Celtic Tiger economic model and to make fundamental changes that will help make it more robust and sustainable.  It is time to switch analysis from the functioning of the economy to the fundamentals of the underlying economic model.

Rob Kitchin