Ireland’s crisis: could it happen here?

The music from Dublin is not a happy tune. The ‘horrendous’ bill for banking excess takes Ireland’s deficit this year alone to 32 per cent of the economy, astonishingly above where its entire national debt was (25 per cent) just two years ago.

As one Irish academic has observed: “Forget state-controlled banks, this sounds more like a bank-controlled state”.

The UK Treasury rejects any notion that the Irish troubles are relevant for the upcoming episode of Osbornean austerity.

Correctly, Osborne’s team points to the fundamental context of Ireland’s membership of the single currency. Britain has benefitted from a 25 per cent depreciation to sterling. The Bank of England has also lowered corporate borrowing costs through its huge money creation scheme. Neither option is open to Dublin.

Ireland’s property bubble, memorably referred to by the head of the Nama (Ireland’s “bad bank”) as the “false boom in property prices”, was more inflated than Britain’s.

It is clear that property prices across Ireland are still falling, nearly 4 years on from the peak. Prices are down 35 per cent across the Republic, and a remarkable 43.3 per cent down in Dublin. In raw numbers, the average Dublin property worth €431,006 in December 2006, is now worth €242,000 according to the Permanent TSB/ESRI house price index. Across Ireland €310,831 worth of average house, is now valued at €201,364.

No wonder that Ireland’s bank balance sheets have been taking a battering.

In Britain, having fallen sharply in 2007/8 average house prices began their utterly bizarre mid-recession bounce in 2009. The divergence with Dublin has been remarkable. Is this really all down to the fact that the “false boom” in Ireland was much bigger? Some of it is surely down to the fact that the UK banks were bailed out twice: once for their survival, and another time to keep, basically, mortgage lending going.

So if that is a factor, the phasing out of support, and likely contraction in mortgage credit in the UK is likely to see the housing market double dip.

Also, it is noteworthy that house price falls accelerated after the Irish austerity plans. So indirectly, austerity will have contributed to the extra costs of bailing out Ireland’s banks.

This is relevant for the UK, and will probably happen here as unemployment rises. The happy news is that in the UK the banks are wrapped in cotton wool, and stress tested for asset price falls like this. Put another way, had Britain announced austerity at the same time as trying to rescue the banks, then the Irish analogy may well have been rather apt.

In the absence of that, the real Irish lesson is in the impact of austerity on political economy. Firstly, bankers will get the blame. And secondly MPs tend to resign when hospitals in their constituency are threatened.