The sudden arrival of Ireland’s hidden crisis

Over the summer of 2008, talk continued in Ireland of a possible slowing of growth, with much talk of a ‘soft landing’, which would result in a painful but temporary adjustment in the Irish economy. Such talk came to an abrupt end in September of that year as the full extent of the crisis in the Irish banks became evident and the Irish state guaranteed the bulk of their liabilities. The guarantee extended to a total potential amount of two to three times GDP at the time. Over the previous years, a number of commentators had warned of the unsustainability of the Irish bubble economy. Some warned of declining competitiveness, others focused on the broader weaknesses of a liberal economic model, while others warned specifically of crises in the housing market – with fewer warning of problems in the banking system (Kelly, 2007). Many of the key elements of Ireland’s crisis had been flagged by a variety of observers. In many cases these observers were pilloried by both the media and leading politicians. Nonetheless, when Ireland’s crash came in the late summer of 2008, the severity of the banking crisis and the extent of its reach across a variety of interlocking areas came as a shock to almost all observers and policy elites.

Ireland’s crisis began in the financial sector, but spread rapidly into the fiscal, economic, social, reputational and political realms (NESC, 2009; Kirby and Murphy, 2011). Each of these crises evolved out of an underlying structural weakness which, in all cases, was masked by an apparently positive overall trend in the 2000s (see Table 6.1).