When Ireland’s Prime Minister Enda Kenny meets with President Obama in Washington next week, they should find plenty to talk about.
Both men are at the helm of economies that are turning around following devastating economic crises. A light seems to be emerging at the end of the tunnel for each, although it's elusive. Ireland is on track to exit from an international bailout program by the end of the year. The U.S. unemployment rate continues to tick down and the country's housing sector is finally on the up-and-up. For all their differences -- chief among them Ireland's membership in the eurozone and heavy reliance on exports -- the countries have shared some less-than-pleasant experiences, and could do well to share the lessons they've learned as a result, as well.
Ireland and the United States followed similar paths into economic crisis, although their routes have diverged in its wake. Ireland was the “Celtic Tiger” during its boom years, but the growth fueled by easy lending standards eventually gave way to a bust. In a speech earlier this month at Dublin Castle in Ireland, International Monetary Fund Managing Director Christine Lagarde called the Irish financial crisis a “bubble-driven bonanza of lax lending, mounting private debt, skyrocketing property prices, and eroding competitiveness,” “excess with little oversight.” The U.S. could have been described in similar terms in the years leading up to the bursting of its massive housing bubble, the consequence of which was the deepest recession since the Great Depression.
Then, the paths diverged. The Irish experience contains a cautionary note (don't let your banking system run wild) and a lesson (gradual deficit reduction can do good).
First, the cautionary note. “Ireland should be really a warning sign to American policymakers, as well, because essentially… what we had here in the United States is a mini version of what happened in Ireland,” said Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics. “The single biggest lesson from Ireland is that even if you do everything else right, if your banks get out of control, you’re toast.”
Ireland is part of the European Union and euro zone, and has been supported by a massive 85 billion-euro bailout from the EU and IMF. The bailout, which it received in 2010 when its banking system was on its knees and the country struggling to borrow, had strings attached: Ireland had to restructure and reorganize its banking sector, trim its deficits and implement structural reforms to help the country return to sustainable growth levels.
And so the country has consolidated and recapitalized its banking sector, shrinking it down to more closely resemble Canada's banking sector, dominated by just a handful of national banks, in contast to the sprawling one in the United States.
The U.S. has also reformed its banking system through the 2010 Dodd-Frank financial reform law, which is slowly being implemented. But some believe the law doesn’t go far enough toward preventing the recklessness that contributed to the 2008 financial crisis. “For the past four years, the nation’s political leaders and bankers have made enormous—in some cases unprecedented—efforts to save the financial industry, clean up the banks, and reform regulation in order to restore trust and confidence in the American financial system. This hasn’t worked,” Frank Partnoy and Jesse Eisinger recently wrote in a deep-dive Atlantic story on the banking sector. “Banks today are bigger and more opaque than ever, and they continue to behave in many of the same ways they did before the crash.”
Ireland has also abided by the other terms of its bailout. Today, the “Celtic Tiger” is held up as a model of austerity in the eurozone. It won praise this week from the Institute of International Finance, a global association of financial institutions, for the gradual pace of its deficit reduction: “A more tempered fiscal consolidation has helped Ireland succeed in restarting the growth needed to underpin debt sustainability and renew bond issuance,” the IIF said in a research note, adding that fellow bailout recipient Greece could take a page out of Ireland’s book.
In the United States, debt and deficits are a problem, too, but change has taken a different path. The economy has lurched from one fiscal crisis to the next as a divided Congress fights over passing a budget and raising the nation’s borrowing limit to prevent default. Spending reductions came abruptly, rather than gradually, this month when across-the-board cuts known as sequestration, which were included in a 2011 deal to raise the debt limit in the hopes of forcing a future agreement on getting the nation’s finances on the right track, went into effect (Congress couldn’t reach a deal to avoid them, much less set the country on the path toward deficit reduction). There's a new sliver of hope for a grand bargain, but passage of such a deal is far from assured. Economists have urged a slow and steady path toward fixing the nation's finances, but lawmakers haven't been able to agree on such a course.
Ireland got some good news this week; on Wednesday, it had its first 10-year bond issuance since receiving the bailout funds. The strong demand for the longer-term Irish bonds affirmed that investors perceived the signs of strength in Ireland's economy as real and this has raised hopes that the country would soon emerge from its bailout program. There are signs of economic improvement in the United States, too: Stocks continued their climb to record highs, and although there's some concern that the central bank's easy-money policies could produce an asset bubble, a number of economists point to at least some strengthening in the fundamentals and hope for the future when they describe the soaring Dow.
Both countries have a long way to go. Unemployment in Ireland remains high at 14.1 percent in February, well above the 4.6 percent it was in 2007. In the United States, the jobless rate is 7.7 percent, versus 4.5 percent six years ago. The fates of the two economies are linked. Ireland depends enormously on trading partners like the United States, and could see closer links if the US-EU trade deal being discussed is enacted. Both must emerge from their crises better prepared to withstand the next, by shoring up their banking sectors and getting their fiscal houses in order. Perhaps Obama and Kenny can commiserate the tough road, or swap tips for the path ahead, when they meet on Tuesday.
This article appears in the March 18, 2013, edition of National Journal Daily.