Ireland's short road from success to recession

With an EU-IMF bailout deal pending, Ireland's recent financial woes are a dramatic end to a decade-long success story that led many to dub the nation the "Celtic Tiger." Between 1994 and 2007, Ireland's real GDP growth averaged over 7% annually; however, during the recent recession, the economy shrank by 3.6% in 2008 and by 7.6% in 2009. Why is Ireland so vulnerable to this economic downturn?

Ireland's economic success was fueled by a surge in both consumption and investment. Soaring consumer and business confidence levels, combined with extremely low interest rates and corporate tax rates, pushed the economy to new highs. Driven by large amounts of speculative construction and surging prices, Ireland's property market was grossly inflated
and its banks were overextended. As in the United States, the bursting of the credit and property bubbles in 2008 created a national banking crisis and pushed the economy into deep recession.

The Irish government's pledge to guarantee the debts of Ireland's largest banks in September 2008 pulled the state into crisis, as well. Ireland's deficit ballooned in 2008 and 2009, and led to last month's request for an EU-IMF bailout package, now projected to be 85 billion euros. Linked to that aid package, the Irish parliament is currently debating a strict budget that would put Ireland on track to bring their budget deficit below 3% of GDP by 2015. Ireland's economy is showing some signs of stabilization in 2010, but the road ahead is going to be an austere one
for this European engine of growth.

The three charts on the right show three aspects of Ireland's trouble:

Top: The dramatic drop in GDP growth starts in early 2008. You can see that growth has stayed down since then, and is showing only modest signs of rebounding.

Middle: Ireland's housing bubble grew and burst quickly, with Irish homes losing more than one third of their value since 2007.

Bottom: Ireland comes in second for the most severe debt crisis in Europe.

Click on any image to enlarge.