Bertie

by Colm Keena

  This developing tone of ‘soft Euro-scepticism’ fed into the Nice Referendum in June 2001, in which a low turn-out voted 54 to 46 per cent against, creating a dilemma not only for Ireland but also for the union on which it was so heavily dependent. According to Brigid Laffan,

  Suddenly we had a problem with the EU, and Ahern understood very quickly that he needed to get Ireland back onside. One thing about Ahern is that he recognised constraints pretty quickly. He responded very quickly . . . And that then dampened down that Euro-sceptic end of the cabinet.

  While the tension between Dublin and Brussels created by McCreevy’s expansionary budgets in the period before the 2002 election eased with the downturn of those years, Laffan believes that Europe continued to be concerned about Ireland’s economic policies, the erosion of its tax base and its pro-cyclical budgetary policy.

  However, Ireland was the poster boy of the Baltic and Eastern European countries that were lining up to join the EU. For them Europe had been a huge stabilising factor in the wake of the collapse of the Soviet Union, since it was clear that nationalist tendencies would have to be suppressed and parliamentary democracy developed if they were to gain entry to what they saw as the rich men’s club. Acccording to Laffan, politicians and senior civil servants from these countries rolled in to Dublin wanting to talk about Ireland’s experience of EU membership.

  Ireland had been a poor country and was now a rich country. And in the history of the EU, Ireland is the only country that came in a poor country, below 75 per cent of the average per capita income, and converged [with the average income]. No other country has ever converged except Ireland. It is an extraordinary achievement. Right up to before the Single European Act [1987], our per capita incomes were still way down, around 65 per cent of the EU average. We were still way off, until the single market came. I’m convinced structural funds helped, but it was the single market that drove it in the end, coupled with the devaluation in the early 1990s.

  Fig. 5: Income per capita relative to EU average, 1991–2010

  Source: Rob Wright, report on Department of Finance. Reproduced with permission.

  There was another difficulty. The single currency had a set of rules governing borrowing and debt levels for member-states. Seen from the point of view of these rules, Ireland was again the star pupil. It was running government surpluses and paying off its national debt, driving it down to levels below the European average. How then could it be criticised as an errant member of the euro club?

  The period when Ahern was in power was one of tectonic shifts in the global economy. Countries like China and India were selling ever-increasing amounts of manufactured products to the richer countries. The huge savings they amassed became available for the global financial system, and this in turn tempted many countries, companies and people to take on excessive debt. Western countries found themselves involved in a heavily globalised marketplace with competitor economies that had wage levels far below the Western norm. Technology boosted the capacity for outsourcing. Blue-collar income in many Western economies, including the United States, has fallen in real terms over recent decades, and the income level of the middle classes is treading water. Capital, meanwhile, has benefited from lower wage costs and access to the global marketplace.

  The development of the European banking system saw banks moving into new markets. New entrants into the Irish market increased competition at the same time as money became more easily available in the international markets. This increased banking competition and new access to unlimited cheap money occurred as the Irish economy had just come through a period of exceptional economic growth. As Regling and Watson put it,

  this fostered expectations of a continued rise in living standards and in asset values. Another factor, with even deeper roots, was the strong and pervasive preference in Irish society for property as an asset, and the fact that Ireland never experienced a property crash.

  Regling and Watson made it clear in their report that they were not saying that what occurred was inevitable. They pointed out that prudent Government policies aimed at mitigating the risks of the boom-bust cycle could have increased the chances of a soft landing. However, the opposite path was the one chosen.

  Fiscal policies heightened the vulnerability of the economy. Budgetary policy veered more towards spending money while revenues came in. In addition, the pattern of tax cuts left revenues increasingly fragile since they were dependent on taxes driven by the property sector and high consumer spending.

  Ireland was also unusual in having so many property-related tax reliefs but no property tax. Regling and Watson pointed out that such was the level of tax reliefs available during the Ahern years that in 2005 the OECD calculated that the cost of giving these reliefs was greater than the actual amount of income tax collected.

  The failure at the Government level was accompanied by the spectacular failure at the banking and supervisory level, as well as by that of the civil service generally. The performance of international bodies such as the OECD and the IMF was patchy. Although some did strike occasional warning notes about what was going on, in general the criticism was muted, and it was accompanied by other commentary of praise for, and even awe at, the Irish performance.

  According to Greg Sparks, a Taoiseach and a Minister for Finance need to be ‘apart from as well as a part of.’ He meant that they should at all times be standing back from what is going on, even if it is their own work, and questioning its wisdom. He doesn’t think that Ahern, McCreevy or Cowen did this during their periods in office. ‘I think they listened to their own propaganda.’ Criticism was not invited and was sometimes nastily repulsed. When John FitzGerald and some of his colleagues in the ESRI warned about the dangers of the Government’s fiscal policies in 2000, McCreevy dismissed them as ‘pinko-liberals’. A few days after the comment, Ahern, during a trip to a meeting of the Irish Management Institute in Cork, referred to a kind of ‘creeping Jesus’ who was always criticising Government policy but had been shown to be wrong. Some commentators

  always want the glass to be half empty . . . Provided we maintain our discipline, we will have great pleasure in confounding the pundits in the City of London, Brussels and Frankfurt, who, blinkered by orthodoxy, still cannot quite understand how the Irish, of all people, have managed to get it right.

  The nationalism involved in the response is interesting, but what is most important is that this was the Taoiseach and leader of Fianna Fáil responding to considered comment by senior members of the organisation set up by Lemass to provide continuing analysis of economic policy.

  In March 2001 the ESRI published a paper by John FitzGerald entitled ‘Fiscal Policy in a Monetary Union: The Case of Ireland’, in which he said that in a monetary union the handling by a government of its finances—fiscal policy—can affect wage inflation and the allocation of resources within an economy. By the latter he meant that money and economic activity can be directed towards or away from particular sectors.

  For example, fiscal policy can have a significant effect on the domestic housing market through changing household disposable income and through changing the cost of capital for homeowners. The tax treatment of interest payments on house loans can have a big effect on the cost of capital for homeowners. Because the legal instrument under which the mortgage lending takes place is country specific, the taxation or subsidisation of mortgage interest payments is not affected by the country of residence of the financial institution making the loan.

  By the latter point FitzGerald was saying that, although banking was becoming more international, it was still possible to use the treatment of mortgages—which were specific to countries—to affect housing. Because of monetary union, the rate of interest charged was no longer under the control of the Central Bank. But, instead of the Central Bank raising interest rates to calm the housing market, the Government could alter its treatment of mortgage interest payments and have the same effect.

  To date the fiscal policy instrumen
t has not been used actively in Ireland to reduce demand for housing in the current boom. It remains possible for the government to eliminate interest relief on mortgage interest payments in the income tax code. In addition there are a range of other fiscal measures that could directly reduce demand pressures in the building sector.

  FitzGerald’s suggestions that taxation be used to calm the housing market and that special tax incentives for building be removed were of course not listened to.

  For Laffan, the concern that was created within the European Commission about the management of the economy by McCreevy’s policies in the period before the 2002 general election never went away. Asked for her view on how we managed the transition to becoming a member of a single currency, she gave a stark reply.

  We didn’t. We didn’t take on board the fact that as a member of a single currency we had fewer instruments and levers in terms of our economy: we didn’t have devaluation to regain competitiveness. Given the state of the German economy at the time, we were likely to have a low interest regime, and we had a booming economy, and we didn’t understand [the consequences of this]; or if we did we ignored it because it made political sense to ignore it. We continued to behave as if we weren’t in a single currency, and the consequences have been disastrous.

  They didn’t sit down and think. It would have required Finance to put on paper to the cabinet about what being in a single currency means. Did they do that? I suspect not. I doubt if McCreevy was in that mode. I don’t think McCreevy saw a constraint. I think he saw: reduce taxes. He was very much at the liberal end in terms of his economic philosophy and outlook. I think he was [in favour of] less state, less regulation, and let the country fly. You know, capital gains tax, he really was very pro-enterprise in an extraordinary way. So I can’t imagine he ever wanted something to go to cabinet saying ‘Constraint, we need to tie our hands behind our backs.’ I can’t see it.

  Laffan said that when interviewing senior civil servants throughout the departments in the late 1990s she formed the impression that there was something wrong with the Department of Finance, and she reported her view to the Department of the Taoiseach. She felt it was a department that was not performing as well as it should. One of the surprising aspects of the department that came into focus after the collapse of the economy was the absence of any serious research component. Laffan contrasted the department’s brainpower with the finance ministries of other European states, where large numbers of economists at the PhD level and higher conduct research on the economy that their department is managing. Indeed, a number of economists and social researchers spoken to by the present writer in the period since the crash mentioned this failure to encourage research, and not only by the Department of Finance. Amazingly, industrial relations issues may in part be behind the phenomenon, as the grading structures that operate do not allow highly qualified economists and social scientists to be paid at rates approximating what they might get outside the public service.

  However, it is difficult not to believe that there may have been political reasons for this failure of management, ones relating to not wanting a civil service that would challenge its political masters. Certainly there is a widely held view that independent views were not encouraged in the Department of Finance, or elsewhere in the public service, during the Ahern years.

  Pat Rabbitte is of the view that the rapid increase in the rate of pay of the state’s senior civil servants might have softened them and in an indirect way prompted them to acquiesce in the unwise economic policies being pursued by their political masters.

  It worries me if you look at it now that Alan Aherne writes a few articles in the Irish Times and the next thing he’s the chief economic adviser; Peter Bacon is in charge of banking; Colm McCarthy is in charge of public expenditure. You are almost driven to the conclusion that if you are an economist it’s not safe to walk down Merrion Street or someone will grab you and drag you into Finance and give you a job. What the fuck were they doing before this?

  Laffan, for her part, says that the Irish interaction with Europe has been mixed and that some aspects of how we engage with Europe are very successful. She does not believe that the performance-possessor explanation offered by Prof. Lee in Ireland, 1912–1985 is an accurate or full one. ‘It is too much of a silver bullet,’ she said. The fact is that there has been excellent performance in some sectors, notably in relation to industrial policy and the attraction of foreign investment but also in relation to many of the ways in which Ireland has interacted with Europe.

  What is clear is that Ahern’s period as Taoiseach, and McCreevy’s period as Minister for Finance, followed by his period as EU Commissioner, coincided with a change in the European view of Ireland as a ‘good European’. In April 2011, during a visit to Dublin, the EU’s most senior civil servant, the Irishwoman Catherine Day, who is the secretary-general of the EU Commission, said that the ‘shine’ had gone off Ireland in Europe and that it had lost the good will that had formerly existed. ‘The perception is that the more prosperous Ireland became, the more arrogant it became, and the less it engaged. It shouldn’t be a fair-weather engagement.’

  Blair Horan said that when he is abroad meeting colleagues in European civil service trade unions, he encounters annoyance that Ireland, having been allowed into the euro club, went on to mismanage its affairs at a cost to the club generally.

  Ahern and his Governments did not seem to understand that the management of a boom and the transition to a single currency involved a new and substantial challenge for political leadership. He did not seem to understand that because of the one-off and historic nature of what was occurring there was an onus on him to devise strategies that would make the most of the opportunity he had inherited. He appears to have been fixated on short to medium-term growth but to have had little by way of interest in how growth could be used to establish an optimum medium to long-term environment for maximising the well-being and potential of Irish society.

  Laffan sees an explanation for this in the struggles that dominated public life during Ahern’s early political career. When he became Taoiseach he did not see his role as bringing the country to the next stage.

  I suspect he thought he had brought it somewhere. He had inherited an economy in very good nick in 1997. I mean the rainbow Government . . . Ruairí Quinn turns out to be the last good Minister for Finance we had. I think Ahern thought we had arrived.

  EPILOGUE

  KESHCARRIGAN

  On the day I went from Dublin to Co. Leitrim to have a look at housing developments there, the Met Office was warning of an impending period of unusually cold weather. Snow was expected by the weekend. On the radio all the talk was of the external financial assistance that Ireland was receiving from Europe and the IMF, the extent of the loss of sovereignty involved and the role that Ireland’s finances were playing in the crisis buffeting the euro and the EU. Anger and dismay among the public was such that Fianna Fáil’s popularity ratings were falling to levels where its continued existence had become a topic of conversation. Bertie Ahern’s place in the history books was going to be very different from the one he had dreamed of.

  I pulled in near Enfield, at the new motorway stop on the M4, for a late breakfast and a look through the morning newspapers. When I was getting up to leave I was greeted by a former multi-millionaire publican and hotelier sitting at a nearby table. We’d met down at the courts when his businesses were being put into receivership by the banks. It was a cold day, we agreed, but beautiful too. He was heading to the west.

  On the road between Longford and Carrick-on-Shannon I got my first glimpse of boom-time housing estates built on the edges of towns and villages. For some reason a type of ice-cream yellow was the colour of choice. The houses were large, and the estates in the midst of the otherwise monotonous grey-green countryside looked like some alien crop that was threatening to grow out of control. Every now and then I passed a would-be mansion adrift in a field, the site abandoned, the structure half
built and open to the rain and the wind.

  I’d chosen Carrick-on-Shannon because of what Ruairí Quinn had told me about his surprise at being asked, during a visit there when he was Minister for Finance, whether or not he would grant special tax designation status to the whole county. In the town I met the local estate agent Liam Farrell of DNG Farrell, a brother of Pat Farrell, the chief executive of the Irish Bankers’ Federation and former general secretary of Fianna Fáil. We met in Liam’s office looking out at the Shannon in a new development alongside the Landmark Hotel. He remembered the meeting with Quinn and what he said was a more encouraging encounter with the then Taoiseach, John Bruton. What you have to remember, he said, was the economic situation at the time in Co. Leitrim. ‘It was appalling.’

  The county was a poor backwater known for bachelors and suicide. The only thing going for the county at the time, according to Farrell, was that its young people had the highest per capita involvement in third-level education. ‘It was a meal ticket out.’ Such organisations as the Irish Farmers’ Association, the chambers of commerce and the business community generally felt that Co. Leitrim was being overlooked by the Government and was in need of a fiscal stimulus.