Monday, April 20, 2009

Who's talking about Ireland now?

It became very tedious a few years ago to listen to continual unfavourable comparisons of New Zealand with Ireland coming from the kind of commentators on New Zealand economy and politics that read the Wall Street Journal.

Given that Ireland was an EU member, a short plane flight from continental Europe, I was never sure that the comparison should carry much weight.

Nevertheless it might pay to note that Ireland has, perhaps predictably, been a major victim of the global financial crisis, with GDP this year predicted to fall 10% below its peak.

Paul Krugman's description of the situation there may have some lessons for New Zealand.

How did Ireland get into its current bind? By being just like us, only more so. Like its near-namesake Iceland, Ireland jumped with both feet into the brave new world of unsupervised global markets. Last year the Heritage Foundation declared Ireland the third freest economy in the world, behind only Hong Kong and Singapore.

One part of the Irish economy that became especially free was the banking sector, which used its freedom to finance a monstrous housing bubble. Ireland became in effect a cool, snake-free version of coastal Florida.

Then the bubble burst. The collapse of construction sent the economy into a tailspin, while plunging home prices left many people owing more than their houses were worth. The result, as in the United States, has been a rising tide of defaults and heavy losses for the banks.

No comments: