Ship of Fools: How Stupidity and Corruption Sank the Celtic Tiger
by Fintan O’Toole
PublicAffairs, 230 pp., $25.95
In his Memoir published in 2005,1 the year before he died, the writer John McGahern began by describing the physical geography of the Irish county he was born in and to which he eventually returned. “The soil in Leitrim is poor, in places no more than an inch deep,” is McGahern’s opening sentence, comprising facts that as a part-time farmer he had good reason to know. He goes on to explain how the bands of clay and dense gravel that lie underneath have created, with the help of western Ireland’s heavy rainfall, a landscape clotted with lakes, small fields, and high hedges. “The very poorness of the soil saved these fields when old hedges and great trees were being levelled throughout Europe for factory farming,” McGahern writes, “and, amazingly, amid unrelenting change, these fields have hardly changed at all since I ran and played and worked in them as a boy.”
Some of McGahern’s great appeal as a writer lies in his evocation of a way of living—rural, poor, insular, morally tutored by the Catholic Church, stripped of its energetic young by their migration to Britain and America—that was slipping into history even as he looked out at it from his farmhouse window in the last decade of his life. Like many country people in Ireland, he lived with a powerful sense of the absent, and perhaps nowhere in Ireland was this sensation stronger than in Leitrim, which has the smallest population of any county in Ireland and none of the grand scenery and Atlantic seashore that bring tourists and their money to nearby counties such as Mayo and Galway. In 1841, before the famine and the collapse of its handloom industry, Leitrim could count a population of 155,000. Today its 613 square miles contain fewer than 30,000 people. After 1841 the population went down and down—until 2002 when, for the first time since the potato blight, the figure showed a small increase. A larger increase was registered in the census for 2006.
That was the year the Celtic Tiger leapt highest, and here, among McGahern’s poor fields, is where the beast has left some of its most visible paw prints. Bright signs stick above the dark hedgerows: “Luxury development of highly distinctive homes” and “€100,000 off original price.” Behind each of them lies a cluster of two-story houses with pitched roofs and carports that could just as easily belong in the suburbs of London or New York. Very few are occupied, some are unfinished, dandelions sprout on lawns that have run wild. Who was expected here? They look like houses built for junior executives with two children and two cars, but how many of them could the Leitrim economy possibly have supported even when the boom was at its height? They add another layer of human absence to the fields around them: first, the people who went away; now, the people who never came.
These scenes, as Fintan O’Toole shows in Ship of Fools, can be repeated all over Ireland. According to the country’s Institute of Regional and Spatial Analysis (NIRSA), more than 300,000 new houses were reported to be standing empty in January of this year, most of them in more than six hundred so-called “ghost estates” (or “developments,” as Americans would say). Many counties have more ghost estates than Leitrim—Cork has ninety of them—but Leitrim emerges as Ireland’s champion when empty houses are compared to the number of the local population. NIRSA’s director Rob Kitchin calculates that 2,945 homes were built in Leitrim between 2006 and 2009 when the growth trend suggested that only 588 would be needed—an oversupply of around 400 percent. The link between demand and supply had become “completely uncoupled,” Kitchin told The Irish Times, estimating that it would be seven to ten years before property prices in places such as Leitrim returned to “anything close” to their pre-crash levels. “A lot of these houses will undoubtedly have to be knocked [down] and their continued existence will keep the housing market in some areas depressed for a very long time to come.”
The mystery of how so many useless new houses came to be built in a remote part of Ireland might have the usual explanation: that rash speculation had been unwisely left to go its own way by the state. Such an impression of previous government passivity would certainly be helpful to the Fianna Fáil party, which has governed Ireland since 1997 and which on September 30 announced it would spend up to €18 billion on a further state bailout of Irish banks—otherwise, in the words of Brian Lenihan, the finance minister, their insolvency would “bring down” the Irish state itself, in ways he didn’t go on to describe.
Lenihan put the blame squarely on the banks for their “pattern of reckless lending,” but as Fintan O’Toole demonstrates time and again in this book, the government was far from being a helpless spectator. Its policies and behavior were crucial to the property boom that, when it inevitably turned to bust, wrecked the Irish economy so spectacularly. O’Toole has written much about the theater, including brilliant studies of Shakespeare and Sheridan, and he sees tragedy, absurdity, and of course hubris among the human ruins left standing on the national stage. What he shows most memorably, however, is how Ireland’s political leaders were complicit in the boom’s every aspect: land acquisition, planning permission, funding.
Taxation, for example: developers of new housing estates could set their costs against tax under a regulation, Section 23, that was originally intended to encourage the redevelopment of run-down areas in towns and cities. Property companies soon seized on Section 23 as a far broader tax-avoidance measure and local and national governments did nothing to discourage them. In Leitrim, which came late to the game, the local authority sought successfully to have Section 23 extended to the whole of the county. Consequently, O’Toole reports, one in every three of Leitrim’s houses now stand empty. Nationally, the state ended up subsidizing at a cost of about €2 billion “the building of houses whose purpose was to provide shelter, not for real people, but for the taxes of their builders.”
In 2006, at the height of the boom, construction accounted for almost a quarter of Ireland’s GDP and occupied a fifth of the workforce. Thousands of workers came from the poorer regions of Europe to meet the demand; Ireland, one of the great historical sources of emigration, became a net importer of labor. The migrants rented houses built by an earlier wave of migrants, while they built more houses that their employers hoped would be occupied by the next wave. The increase in debt was terrifying, or should have been (the taoiseach or prime minister, Bertie Ahern, cheerfully remarked, “The boom is getting boomier”). Bank lending for construction and real estate rose from €5.5 billion in 1999 to €96.2 billion in 2007—an increase of 1,730 percent—while house prices doubled in the six years to 2006. Estates for commuters now spread a long way out from Dublin. It cost more to service a mortgage on a house in a muddy field two hours’ drive from the city’s center, remote from shops and schools, than to pay rent for similar accommodation in a desirable part of the city. And on such mortgages the average Dublin couple spent a third of its income.
There had been warnings. As early as August 2000, well before the peak, a report from the IMF concluded that there hadn’t been “a single experience of price inflation on the scale of Ireland’s which did not end in prices falling.” In 2006, Professor Morgan Kelly of University College Dublin said there could be no “soft landing” for property values that had risen so much more steeply than incomes. Nobody wanted to listen. Prime Minister Ahern mocked Kelly as a moaner, and the press tended to take Ahern’s side. More remarkable, as O’Toole writes, was how few mainstream economists came to Kelly’s defense:
Every historically literate economist knew for sure that the Irish property boom was going to crash…. Yet the overwhelming majority of Irish economists either contented themselves with timid and carefully couched murmurs of unease, or, in the case of most of those who worked for stockbrokers, banks, and building societies and who dominated media discussion of the issue, joined in the reassurances about soft landings.
Why were people so stubborn in their refusal to see the blindingly obvious? Why had government, regulators, and speculators migrated en masse to, in O’Toole’s phrase, “the Republic of Catatonia”? The narrow political answer finds a British echo in Gordon Brown’s devotion to “light touch regulation” in the City of London. A democratic country that has chosen low taxes and tolerant financial supervision as the basis of its prosperity still needs to raise the funds that will deliver public goods and services. High salaries and corporate profits in London’s financial industries provided a steady tax stream to the Labour government, which allowed generous public spending.
In Ireland, company taxation and regulation were far lighter, but the governing party, Fianna Fáil, had to satisfy a coalition of voters that included the urban working class, people on welfare, and rural communities pressing expensive local demands on those they had sent to the Dublin parliament. How were these two ideological imperatives, low taxation and high public spending, to be juggled? Ahern’s Fianna Fáil came to depend on the taxes that flowed in from the property bubble; the tax incentives that helped get the property built in the first place were only the priming of the pump.
This was the Celtic Tiger’s crude mechanism, though at the phenomenon’s height very few observers saw its workings so clearly. Until the crash, Ireland was an economy to be admired rather than examined, to be emulated rather than avoided. It took a long time for the truth to come out. In February 2008—shortly before Scotland’s own banks went belly up—the leader of the Scottish National Party, Alex Salmond, was promising that an independent Scotland would create “a Celtic Lion economy to rival the Celtic Tiger across the Irish Sea.” Later in the same year Phil Gramm, economics adviser to presidential candidate John McCain, described Ireland as the “perfect example” of a country that had prospered through tax rates that were among the lowest in the world: “Senator McCain’s people immigrated from Ireland along with millions of others because they were hungry. Today…they [the Irish] have overtaken Americans in per capita income.”
McCain himself returned to the example in his televised debates with Obama, comparing American and Irish business taxes to show why America needed to cut them. “One of history’s weirdest reversals,” writes O’Toole: for centuries the Irish had dreamed of becoming Americans, and now some Americans wanted to be more like the Irish—not the charming, peasant Irish of John Ford’s The Quiet Man but the new Irish, with a Mercedes in the carport, a vacation home in Marbella, and corporation tax set at 12.5 percent. Ireland, though it belonged to the European Union and had earlier benefited from EU largesse, began to see itself as an outpost of American (or Anglo-American) free-market values on the far edge of a continent where various brands of social democracy were still the political norm.
The Irish Model of Development, the Irish Economic Miracle, El Tigre Celta: political parties in nation-states as different as Latvia and Trinidad saw it as a possible future. Ahern quit as taoiseach in May 2008, his reputation by now mired in allegations of personal corruption. A year earlier he had proposed raising his salary to €310,000 a year, which by O’Toole’s calculation would have made him the best-paid politician in the democratic world. Now he found a new career as an evangelist for the Irish strategy. Paying audiences in Honduras, Korea, and Ecuador heard him describe an economic model that could heal national misfortune, irrespective of time and place. Ireland, in O’Toole’s words, offered “empirical proof that the way forward for everyone was extreme economic globalisation, low personal and corporate taxes, ‘business-friendly’ government and light regulation.” It was a compound that, according to its devotees, could transcend history and geography.
By 2008, even before the fall of Lehman Brothers, it was clear inside the Irish government that the country’s banking system would be lucky to survive its overexposure to the property market; too many loans were turning bad. The political elite, however, persisted in the belief that Ireland’s alchemical economy was robust (only in August of last year did Ahern’s agents, the Washington Speakers Bureau, drop the “Celtic Tiger” speech from his portfolio). O’Toole uses the phrase “unknown knowns” to describe an Irish cast of mind that distances itself from facts it knows to be true but “does not wish to process.” So it was with the property bubble and the bad loans, just as it had been for many more years with corruption and the evasion of laws and regulations. No matter how “voraciously corrupt” (O’Toole’s description of an earlier taoiseach, the late Charles Haughey), it was hard for a politician or businessman to discredit himself completely.
One of many exemplary episodes recounted by O’Toole concerns the Bailey brothers, Tom and Mick, who rose to become among the country’s largest landowners and developers. They admitted systematic tax evasion and eventually paid €22 million in settlement; a judicial inquiry found that Mick Bailey had been directly involved in the bribery of politicians and officials to persuade them to rezone farmland for development, and of giving “false evidence” to the inquiry. Yet the brothers suffered no sanctions, continued to receive big loans from banks, and still mingled freely with Bertie Ahern and his government colleagues inside the taoiseach‘s hospitality tent at the Galway Races.
Later, attempting to explain the origins of the banking crisis, finance minister Lenihan described it as the problem of a small country “with too many incestuous relationships.” Ahern chose a choir-boy innocence as his mode of explanation. Asked in a television studio why it was that he had appointed so many acquaintances to public boards in Dublin, he replied: “I appointed them because they were my friends, not because of anything they had given me….”
Even the strongest-willed and most austere regulator found this environment challenging. “The lines between thievery and patriotism, between private advantage and the national interest, became impossibly blurred,” O’Toole writes. “And if you were a public servant…you were patrolling a minefield.” To Seán FitzPatrick, chairman of the Anglo Irish Bank, regulation was a “corporate McCarthyism [that] shouldn’t be tolerated.” Unregulated, or insufficiently inspected, FitzPatrick’s bank secretly lent him €84 million to invest in property speculation, which was, after all, the method by which the bank itself had recklessly grown its loan book from €15.1 billion in 2001 to nearly €100 billion in early 2008. But the property assets that secured these loans had now shriveled in value and by Christmas that year Anglo Irish’s shares were almost worthless. No amount of brazen share manipulation could save Anglo Irish and it was nationalized soon after, supplying €28 billion of the €77 billion in loans that were assumed by the newly created National Asset Management Agency, the state’s “bad bank.”
By O’Toole’s reckoning, preventing the bank’s collapse cost the Irish taxpayer €30 billion—equivalent to Ireland’s total tax revenue for 2009—but already this figure looks too conservative. When Finance Minister Lenihan announced his further bailout on September 30—”Black Thursday” said the Dublin newspaper placards—the government said that it was prepared to fund Anglo Irish up to as much as €34.3 billion. When other bank rescues are included, the total cost to Irish taxpayers will be somewhere between €45 and €50 billion and Ireland’s budget deficit will rise from 12 to 32 percent of GDP. “This [bailout] brings the crisis to a closure,” Lenihan said, repeating his government’s ambition to reduce the deficit to 4 percent of GDP by 2014. That would mean further job losses and wage cuts and the kind of private misery that is so hard to quantify in percentages or can be easily measured by Fitch, Moody’s, and Standard & Poor’s (but out of which, surprisingly, economic recovery is expected to come).
Ireland can appraise the legacy of its Celtic Tiger years in many ways: by its empty houses; by its inept suburbanization of so much countryside; by an unemployment rate of nearly 14 percent; by a budget deficit that per capita is the highest in the European Union; by cuts in public spending that this year will shrink welfare benefits by 4 to 10 percent and wages in the public sector by 5 to 15 percent; by the fact that emigration is returning as the best means of finding opportunity.
The voices of international finance like to praise the Irish government for its single-minded approach to deficit reduction—in the European debt crisis, Ireland is the good boy and Greece the bad—but the Irish themselves, survivors in the wreckage, tend not to take such a dispassionate view. And how could they? Outside Ireland, the flaws of financial capitalism have left people angry everywhere, but confusion tends to dissipate their outrage. We understand the simple notions—bankers make far too much money—but a further search for the guilty hits barriers to the ordinary taxpayer’s comprehension labeled “derivatives” or “credit default swaps.” The causes of our distress can seem abstract and ineffable: “the system we live under.”
Not so to the Irish, who know that theirs was largely a homemade crisis and that it stemmed from a combination of folly and crooked schemes straightforward enough for a child to understand. The “stupidity and corruption ” in O’Toole’s subtitle are fully justified by his account—it’s hard, indeed, to think that any other words would do. O’Toole writes as an angry citizen, a fine satirist, and an energetic and inquiring journalist, and the result is a biting polemic studded with jewels of nearly incredible fact. He makes things clear, and sometimes he makes them funny too: the comedy of greed was very apparent in the boom years, when the state managed somehow to subsidize even the private yachts of the rich. But throughout his narrative he is trying to answer a question: What was it about Ireland that made it prone to such a singular disaster?
O’Toole divides Ireland’s recent economic history into two periods: a period of controlled (some might say rational) growth between 1988 and 1997 and then the madcap Celtic Tiger years that ended in collapse. Until the 1980s, Ireland had a miserable record of economic underperformance, unparalleled by any other country in Europe, which made it the despair of its people; no other European country, wrote the Irish historian John Joseph Lee, recorded so slow a rate of growth of national income in the twentieth century. It was the more prosperous parts of Europe, however, that provided Ireland’s first way forward. The European Union classified the entire country as a disadvantaged area and poured in money from its regional and structural funds—nearly €11 billion between 1987 and 1998—which O’Toole describes, rightly, as the kind of “classic big government interventionism” that the Celtic Tiger era affected to despise.
The Irish, meanwhile, were intervening themselves. Their government brokered a social partnership between bosses and trade unions and invested heavily in higher education, so that today more than 40 percent of the population aged twenty-five to thirty-four has completed “third-level” (university or equivalent) education, the second-highest rate in the EU. At a time of a prolonged global growth and American investment overseas, Ireland found itself lucky in other ways. Decades of emigration had left it with a preponderance of young people. It had no inheritance of heavy industry—no steel works or mines to close or subsidize. Feminism arrived, with effects on both the birth rate and the workplace.
The peace process was meanwhile gathering strength in Northern Ireland—the Provisional IRA declared its cease-fire in 1994—and the Catholic Church was losing its grip on morals and behavior. Society grew more secular, open, and tolerant. Gradually, Ireland appeared to the outside investor as a small, hospitable Anglophone country with an educated workforce and relatively low wages. Gross domestic product per capita, which had been two thirds of the EU average in 1986, achieved parity with the rest of Europe in 1997 and rose above Britain’s in 1999. By the end of the century, every Viagra tablet made by Pfizer came out of County Cork and Ireland exported more computer software than any other country. O’Toole looks back fondly on this time: “The pall of failure that had hung over the Irish state for most of its independent existence seemed to have been blown away for ever.” He also sees it as a lost opportunity. When Ahern’s Fianna Fáil government came to power in 1997, Ireland had an “optimistic, confident” population facing “incredibly favorable global conditions.”
The new government, however, believed it had discovered a quicker-acting formula for wealth creation: tax cuts to stimulate consumption, property to replace manufacturing as the source of wealth, Dublin to become a tax haven for businesses seeking to avoid the more rigorous regimes of London and New York. Ireland turned away from making and exporting goods as the source of its new well-being toward the evanescent world of money and debt. On the one hand, Dublin became the single largest location outside the US for the declared pre-tax profits of American firms. On the other, Ireland’s balance of payment figures slid into the red. “Being prosperous would be replaced by feeling rich” is how O’Toole memorably captures the hidden agenda—hidden, perhaps, even from its initiators. Ireland was far from the only country to embrace it, but by O’Toole’s argument the other countries that did (including the UK) had longer and more robust traditions of relatively clean governance and civic behavior.
Thus the ground was laid for what O’Toole calls “a lethal cocktail of global ideology and Irish habits”—habits or attitudes, that is, born during the unhappiest years of Irish history. These “nineteenth-century revenants” included a primitive land hunger, a political system inspired by the Irish-Americans of Tammany Hall, subversive attitudes to authority born under British rule, and heroic powers of denial (“the unknown knowns”). Revelations of cruelty and hypocrisy had ended the authority of the Catholic Church, but no civic morality had been put in its place and memories of its old instructions, or lack of them, remained. As O’Toole puts it, “Masturbation was a much more serious sin than tax evasion.”
He concludes of the Celtic Tiger:
It was a little too good to be true that Ireland could go from the pre-modern to the post-modern without ever fully creating the structures and habits of a modern democracy. Large chunks of classic democracy were missing—the shift from religious authority to public and civic morality; the idea that the state should operate objectively and impersonally rather than as a private network of mutual obligations; the notion of the law as a universal and neutral check on everyone’s behaviour, whatever their status…. Plonking a hyper-charged globalised economy on top of such an underdeveloped system of political governance and public morality was always likely to create an unbearable strain.
The dead beast, in short, was the price Ireland paid for its haste and greed. All across the country empty houses stand as its memorial, waiting among the poor fields for tenants and new beginnings.
Published in the US as All Will Be Well (Knopf, 2006); reviewed in these pages by Denis Donoghue, March 23, 2006.↩
Published in the US as All Will Be Well (Knopf, 2006); reviewed in these pages by Denis Donoghue, March 23, 2006.↩