Crisis irlandesa

DISCUSSION PAPER SERIES

No. 8287

THE IRISH CRISIS
Philip R. Lane

INTERNATIONAL MACROECONOMICS

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ISSN 0265-8003

THE IRISH CRISIS
Philip R. Lane, IIIS, Trinity College Dublin and CEPR Discussion Paper No. 8287 March 2011
Centre for Economic Policy Research 77 Bastwick Street,London EC1V 3PZ, UK Tel: (44 20) 7183 8801, Fax: (44 20) 7183 8820 Email: cepr@cepr.org, Website: www.cepr.org This Discussion Paper is issued under the auspices of the Centre’s research programme in INTERNATIONAL MACROECONOMICS. Any opinions expressed here are those of the author(s) and not those of the Centre for Economic Policy Research. Research disseminated by CEPR may include views on policy, butthe Centre itself takes no institutional policy positions. The Centre for Economic Policy Research was established in 1983 as an educational charity, to promote independent analysis and public discussion of open economies and the relations among them. It is pluralist and nonpartisan, bringing economic research to bear on the analysis of medium- and long-run policy questions. These DiscussionPapers often represent preliminary or incomplete work, circulated to encourage discussion and comment. Citation and use of such a paper should take account of its provisional character. Copyright: Philip R. Lane

CEPR Discussion Paper No. 8287 March 2011

ABSTRACT The Irish Crisis*
This paper has three goals. First, it seeks to explain the origins of the Irish crisis. Second, it provides aninterim assessment of the Irish government’s management of the crisis. Third, it evaluates the lessons from Ireland for the macroeconomics of monetary unions. JEL Classification: E5 and F4 Keywords: EMU and Irish crisis Philip R. Lane Economics Department and IIIS Trinity College Dublin Dublin 2 IRELAND Email: plane@tcd.ie
For further Discussion Papers by this author see:www.cepr.org/pubs/new-dps/dplist.asp?authorid=131578

* This is a revised version of a paper prepared for the conference on ‘The euro area and the financial crisis’ (Bratislava, September 7th 2010), organised by the National Bank of Slovakia. It is forthcoming in The Euro Area and the Financial Crisis (edited by Miroslav Beblavy, David Cobham and Ludovit Odor), Cambridge University Press. I thank my discussant WendyCarlin and conference participants for helpful feedback. I am grateful to Niamh Devitt, Peter McQuade and Donal Mullins for helpful research assistance. This paper is part of an IRCHSS-sponsored research project on ‘An Analysis of the Impact of European Monetary Union on Irish Macroeconomic Policy’. Submitted 24 February 2011

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Introduction

Ireland is in the midst of a severe crisis. Whilethe global financial crisis has affected all economies to varying degrees, it has been especially severe in Ireland with a cumulative nominal GDP decline of 21 percent from Q4 2007 to Q3 2010. This ranks Ireland among the worst-affected countries in terms of output performance during this period (Lane and Milesi-Ferretti 2010).

Allied to this economic shock, Ireland has also experienced a severefiscal deterioration. After a long period of running surpluses, the fiscal balance shifted from positive territory in 2007 to baseline deficits of 11-12 percent of GDP in 2009 and 2010. Much of this fiscal deficit is structural in nature, such that the resumption of economic growth on its own is not sufficient to restore fiscal sustainability. In addition, the one-off cost of recapitalising thebanking system pushed the overall general government deficit to 14.5 percent of GDP in 2009 and 32 percent of GDP in 2010, leading to rapid growth in the overall level of public debt.

The main factor behind these developments has been the devastating boom-bust cycle in the Irish property market. Since the property boom was financed through aggressive lending by the Irish banking system, the...