Irish Economic Crisis: An Overview

2230 words (9 pages) Business Assignment

17th Apr 2020 Business Assignment Reference this

Tags: Business AssignmentsFinanceEconomicsInternational Business

Disclaimer: This work has been submitted by a student. This is not an example of the work produced by our Business Assignment Writing Service. You can view samples of our professional work here.

Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of BusinessTeacher.org.

Introduction

The Irish economy was impacted after 2007 – 2008 by an unprecedented financial shock of severe magnitude, which severely conditioned the country’s historically strong macroeconomic performance, undermining what seemed to be a very successful economic development trajectory prior to the said crisis (Boullet, 2015). The country’s G.D.P. growth plummeted quite dramatically at the height of the Irish crisis, decreasing almost 5% (Figure 1). The Irish Crisis was the corollary to the Global Financial Crisis which started with the collapse of the U.S. real estate and the credit derivatives markets (Shiller, 2008).

The present coursework discusses the recent economic and financial crisis in Ireland which essentially lasted from 2007 to 2013. This coursework is structured as follows. The coursework first delves into the lessons learned and the effectiveness of the ensuing policy responses to the said shock, in order to enquire whether policy makers have implemented safety mechanisms.

Source: Trading Economics (2019).

The major determinant of the severe economic downturn is related to a particularly massive downturn in the country’s housing market (National Economic & Social Council, 2009).

The graph above from OECD Data shows Irelands GDP Per Capita during the years prior and post financial crisis. This graph shows that due to the financial crisis there was a decrease in GDP during 2008 and 2009. However GDP started to pick up in 2010 and by 2017 was well above pre-crisis levels.

This graph represents the Gross National income in Ireland in the years leading and the years after the financial crisis. This graph shows that Gross National Income started to decrease after 2007 and did not reach pre-crisis levels until 2013.

Residential construction in the country peaked at almost 90,000 units (year: 2006) (National Economic & Social Council, 2009), after which the crisis spread to other parts of the Irish economy. This negative trend ended up cooling off not only the real estate markets, but also the construction industry at the end of that year (National Economic & Social Council, 2009). That is, there was severe financial contagion that spread from the real estate and construction industries to other industries, as Irish banks started to be impacted by bad lending decisions. This ultimately contributed to serial loan default which deeply impacted banks’ loan portfolios and valuations, and, ultimately, the Irish credit channel (Commission of Investigation, 2011). The credit shock subsequently exposed the country’s banking industry’s huge involvement in borrowing short-term funds on international money markets to fund long term property investments and purchases, prompting regulatory bailouts through massive banking bailouts (National Economic & Social Council, 2009).

The graph above shows the unemployment rate in Ireland leading up to the financial crisis and also after the crisis. As seen in the graph the unemployment rate rose sharply in 2009 as Ireland was adversely hit by the recession. Unemployment continued to rise until 2012 where it began to decrease slowly. By 2017, Ireland had not reached pre-crisis levels of employment.

The Irish economic crisis was a major disruptive element in the performance of the country’s banking industry. The onset of such a devastating systemic episode prompted the following lessons. First, it is important to implement crucial crisis containment mechanisms, in order to properly deter the propagation of a given crisis. The main idea is that when a systemic event occurs, the crisis might be arrested before it escalates and damages the real economy (Honohan, 2009). Second, the existence of government support should not neglect the need for banking institutions to have a sizeable capital cushion of capital, due to the potential agency problems associated with the distorted risk incentives in undercapitalised financial institutions. That is, the shareholders of a bank with scarce capital incur greater risks than those of well-capitalised banks (International Monetary Fund, 2015). A more effective policy response should have focused on reinforcing capital requirements prior to the onset of the crisis. Third, asset price booms are quite difficult to control, especially taking into consideration that the volume of credit attributed by the banking system constitutes a critical determinant for the development of these asset price bubbles. In the Irish case, the Irish real estate bubble should have been adequately controlled by the banks, by raising the level of guarantees associated with real estate-related loans, in light of the price unsustainability (Commission of Investigation, 2011). This in turn would have positively contributed to systemic banking stability in Ireland, thus avoiding the costly economic adjustment processes related to the protracted Irish recession. The policy response in safeguarding financial stability was somewhat flawed, although financial stability mechanisms should have been implemented before the Irish crisis. Fourth, the implemented policy responses were in line with the traditional Keynesian approach to dealing with any type of major economic downturn. Following the Keynesian school of thought on this matter, economic crises are typically dealt with through supportive policies on the fiscal front (Stojanov, 2009). Thus, bailouts might be seen as a transfer from governments to the banks’ shareholders, in order to avoid costly bankruptcies that might have strong societal implications. Fifth, it should be noted that, notwithstanding the significant government support to the ailing Irish industry, there is nevertheless some empirical evidence sustaining that the said support might have been misused. In fact, although the system is not as exposed as it was at the height of the crisis to the Irish property market, it is nevertheless reliant on a small number of taxpayers who end up paying the bulk of income tax, which thus opens up the possibility of fuelling a property bubble in the country (The Irish Times, 2018).

Conclusion

The present coursework first described the onset of the Irish banking crisis, while also detailing on the lessons learned and the corresponding policy responses.

References

Bibliography

  • Boullet, V., 2015. The Irish Economic Crisis: The Expiry of a Development Model? Études Irlandaises, Vol. 40 (Issue 2), p. 17-30.
  • Clarke, B. and Niamh, H. (2012). Crisis in the Irish Banking System. [online] Sulis.ul.ie. Available at: https://sulis.ul.ie/access/content/group/38dc5c65-36c8-48f3-b1c9-41df890b2c8d/Readings%20for%20Topic%201/Optional%20readings%20-%20longer%20articles%20on%20crisis/Crisis%20in%20the%20Irish%20Banking%20System_research%20paper.pdf [Accessed 4 Mar. 2019].
  • Commission of Investigation, 2011. Misjudging Risk: Causes of the Systemic Banking Crisis in Ireland. [Online]. Available: http://www.bankinginquiry.gov.ie/Documents/Misjuding%20Risk%20-%20Causes%20of%20the%20Systemic%20Banking%20Crisis%20in%20Ireland.pdf [viewed 21 March 2019].
  • Connor, G., Flavin, T. and O’Kelly, B. (2009). [online] Irisheconomy.ie. Available at: http://www.irisheconomy.ie/Notes/IrishEconomyNote10.pdf [Accessed 18 Mar. 2019].
  • European Commission, 2019. The Economy. [Online]. [viewed 21 March 2019]. Available from: https://ec.europa.eu/ireland/news/key-eu-policy-areas/economy_en.
  • Honohan, P., 2009. Resolving Ireland’s banking crisis. The Economic and Social Review, Vol. 40 (Issue 2), pp. 207-231.
  • International Monetary Fund, 2015. Ireland – Lessons from Its Recovery from the Bank-Sovereign Loop. [Online]. Available: https://www.imf.org/external/pubs/ft/dp/2015/eur1501.pdf [viewed 21 March 2019].
  • Kelly, M. (2009). The Irish Credit Bubble. [online] Sulis.ul.ie. Available at: https://sulis.ul.ie/access/content/group/38dc5c65-36c8-48f3-b1c9-41df890b2c8d/Readings%20for%20Topic%201/Optional%20readings%20-%20longer%20articles%20on%20crisis/The%20Irish%20Credit%20Bubble_research%20paper.pdf [Accessed 4 Feb. 2019].
  • Leddin, A.J., and Walsh, B.M. (2013). Macroeconomics: an Irish and European perspective.
  • Mankiw, G., and Taylor, M. (2011), Economics, Cengage Learning, 2nd edition.
  • National Economic & Social Council, 2009. Ireland’s Five-Part Crisis: An Integrated National Response. [Online]. Available: http://files.nesc.ie/nesc_reports/en/NESC_118_2009.pdf [viewed 221 March 2019].
  • Ravenhill, J. (2016). Global political economy. 5th ed. Oxford University Press.
  • Shiller, R., 2008. The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do about It. United States of America: Princeton University Press.
  • Stojanov, D., 2009. Keynes and economic crises: some reconsiderations. [Online]. Available: https://hrcak.srce.hr/file/70322 [viewed 221 March 2019].
  • The Economist. (2013). Crash course. [online] Available at: https://www.economist.com/schools-brief/2013/09/07/crash-course [Accessed 4 Mar. 2019].
  • The Irish Times, 2018. Ireland has not applied the lessons of the economic crash. [Online]. The Irish Times. [viewed 221 March 2019]. Available from: https://www.irishtimes.com/opinion/ireland-has-not-applied-the-lessons-of-the-economic-crash-1.3644805 .
  • Trading Economics, 2019. Ireland GDP Growth Rate. [Online]. Trading Economics. [viewed 21 March 2019]. Available from: https://tradingeconomics.com/ireland/gdp-growth.

Cite This Work

To export a reference to this article please select a referencing stye below:

Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.

Related Services

View all

DMCA / Removal Request

If you are the original writer of this assignment and no longer wish to have your work published on the UKDiss.com website then please: