The ballad of Ireland and Germany
While the drama of Ireland’s financial crisis reached a boiling point last week, I thought about the time I stayed near Dublin some twenty years ago. The infrastructure was decrepit, and I remember a hand-painted sign erected on the highway that read ‘Please Minister Flynn, repair our awful roads’. As I visited the country periodically over the next two decades, first the sign disappeared, followed by the potholed highway itself. In its place there appeared a six lane motorway heralded by its own sign, a shiny affair that included the circle of stars indicating European Union funding.
By 2007, when I returned to Dublin on professional business, as editor of Life & Pensions magazine, the country was unrecognisable. Its people were affluent and confident. And rather than simply accept handouts from Brussels like the Greeks did, the Irish had seized upon financial services as a way of punching above their weight in Europe. A finance ministry official who agreed to be quoted in my magazine, Aidan Carrigan, explained, ‘we’re competing for business in Ireland to establish it as a financial centre’, highlighting several times how low tax was a key weapon.
Yet there were already signs of trouble to come. Complaints from Germany’s finance minister about the low tax rate could be shrugged off as sour grapes from a nation hobbled by labour inefficiencies. It was less easy to dismiss grievances that light-touch Irish financial regulation was another competitive weapon. By setting up in Dublin, life insurance company AXA could offer more generous guarantees to hundreds of thousands of German customers than domestic competitors restricted by the country’s strict capital rules, complained Germany’s insurance regulator. Meanwhile, German banks, such as Depfa and Sachsen LB, flocked to Dublin as a favoured home for making risky mortgage investments without hindrance.
Perhaps naively, the Irish saw their Celtic tiger as a virtuous beast capable of teaching Europe about capitalism, and shut their ears against the noises from Germany. Instead, with the help of fellow countryman Charlie McCreevy as internal markets commissioner, the finance ministry preferred to use EU-level discussions to outflank Germany, pushing an agenda of sophisticated finance and deregulation. ‘There is very little bilateral engagement at government-to-government level’, Carrigan told me, tweaking Germany’s tail.
By late 2009, the Dublin mandarins were chastened by the near collapse of their banks and knew how lucky they were not to have had to bail out Depfa as well. They had learned that the soft regulatory culture which allowed Irish-domiciled multinational insurers and banks to undercut domestic German financial services providers had allowed Irish domestic banks to inflate a corrupt property bubble. The officials were prepared to do a bit of horse trading with Brussels, giving up the right to deploy light-touch regulation competitively in return for keeping their low tax incentives.
A year later, and the ministry has run out of cards to play. Yes, there is something cruel in how the Germans appear to have ruined Ireland’s chances of economic sovereignty with their talk of bondholder haircuts. But it sounds like payback time to me. Over a century ago, one of the greatest Irishmen of all, Oscar Wilde, tweaked the tail of the English bourgeoisie with his wit, and got crucified for it. ‘Each man kills the thing he loves’, he wrote afterwards in The Ballad of Reading Gaol. He could have been talking about Ireland’s twenty year experiment in economic freedom.