Reasons for Irish Recession
- Collapse in the Housing Boom. After record levels of house price rises, the Irish housing market turned and now house prices are falling rapidly causing a decline in consumer spending.
- Decline in Construction. Since the mid 1990s, the construction sector has been a backbone of the Irish economy (accounting for 25% of GDP - the highest figure in the EU) With banks unable to lend and house prices falling, construction has declined rapidly causing unemployment and falling spending.
- Banking Sector in turmoil. Like the UK, Ireland has a major problem with the banking sector. Banks have lost money in bad debts and are now struggling to repair their balance sheet. Many have been nationalised or are facing effective nationalisation.
- Falling consumer spending.
- Decline Global demand. Irish exports are slowing down exacerbated by a strong Euro and falling growth in US, UK and the Eurozone.
- The Irish economy is closely tied to the US economy. The US gave over 33% of inward investment into Irish manfacturing. The recession in US is likely to cause a knock on effect in Ireland.
The Euro is No Protection against Economic CrisisThe Euro can offer exchange rate stability and strength. But, membership of the Euro also brings drawbacks in a recession. There is no scope for a devaluation to improve competitiveness of exports and encourage growth.
There are also limits on government spending to boost the aggregate demand. (Growth and stability pact)
It is argued that the Euro's stability encouraged many fringe economies like Ireland, Greece and Spain to borrow more than prudent causing rising levels of debt, which credit markets are now reluctant to support.