Ximena 2.

What is "Ireland's Economic Miracle" and how was it challenged from the year
2000?

The Ireland Economic miracle describes how Ireland became one of the most prosperous
European economies from the mid-1990s to the late-2000s after being a poor country by West
European standards. This miracle has been explained through many factors: low corporate
taxes, low wages, US economic boom, foreign investment, stable national economy, adequate
budget policies, EU membership, and EU subsidies.

During the 1990s, Ireland emerged from a lengthy period of economic stagnation marked by high
unemployment, emigration, and crippling public debt despite high tax levels. From 1988 to 2007
real GDP expanded by 6% per annum on average. Even more astonishing, the unemployment
rate shrank from 16% in 1994 to 4% in 2000 – essentially full employment for the first time in
modern history. Non-agricultural employment jumped from 33% of the population in 1993 to
46% by 2007.

Until about 2000, the growth had been on a secure export-led basis, underpinned by wage
restraint. However, from about 2000, the character of the growth changed: a property price
and construction bubble took hold. This boom sustained employment and output growth until
2007 despite a loss of wage competitiveness. The banks fuelled the boom, especially from 2003,
exposing themselves both to funding and solvency pressures. Successive Governments had
bought industrial peace with tax reductions, relying increasingly on volatile sources of revenue,
thereby making the tax base increasingly vulnerable to a downturn.

So, after almost two decades of rapid growth, Ireland’s economy has collapsed more severely
than almost all others in the current economic downturn. Real GDP fell by over 2 per cent in 2008
and is expected to fall 8 per cent in 2009 and a further 3 per cent in 2010. The downturn in the
real economy has been reflected in the sudden emergence of a twin crisis in the banking sector
and in the public finances. These in turn have fed back negatively into credit availability and
rising tax rates deepening the output loss.
What went wrong? It is an interesting boom and bust story, which combines hubris formed
during the years of solid growth (before about 2000), the unprecedented experience on inward
migration and the demonstration effect of financial excess in neighbouring countries. EMU
membership plays a subtle role in the story in the way in which its lulled policy makers into a
false sense of security. At the same time, having the euro has equally protected Ireland from an
even worse financial collapse today.

Ximena 3. Compare the accession process of Greece, Spain and Portugal to the EC!

Subject/country Greece Spain Portugal

Final Association request (for

1962 1962 1962
AA) sent by the country

Application for full accession to

1975 1977 1977
the EC

Accession negotiations started 1976 1977 1977

Negotiations ended 1979 1984 1984

Signing of the agreement 1979 1985 1985

EC membership 1981 1986 1986

1. Spain
 60s: economic miracle in Spain
 In 1962: association request was sent but it also meant a transformation period in
economic terms – the time to implement the plan actively.
 Economy turned into a free-market economy, industrialization (modernization and
change in the economic legislation), tourism as well as FDI increased dramatically.
 70s: Ullastres Agreements: preferential trade agreements with the EC. Spanish could
flow asymmetrically (beneficial to Spain) and progressively into European Market
because of the elimination of the EC trade barriers: significant reduction on tariffs, and
some quotas were eliminated. Participation of Spanish products (mainly industrial)
within EC increased. Clash between UK as main partner of Spain and EU (UK joined the
EC until 73).
 In 76: severe economic problems (transitional period): unemployment, and
inflation sky-rocked, agricultural sector crashed.
  In 1978: EC accession negotiations started in the Spanish government:
- They accepted all terms from the principle of adopting community rules,
principles and institutions.
- Transitional agreements: protection of Spanish industrial goods for 6
years and agricultural goods for 7 years.
- Reduction in tariff protection: from 20% to 4%.
- Requested special relation with Latin American countries - regime
extended to Latin American countries as former colonies.
- Transformation of the CAP: replaced price mechanism for the income
mechanism until 1988.
- Industrial goods: fear for Spanish steel and coal industries.
- Fishing: because of the big size of the industry in Spain, a transitional
period of 15 years was agreed.
- VAT: to be introduced by 1986.

 80s: Economic problems still unresolved: unemployment, inflation, FDI collapse,

government deficit (5%).
 predominance of state-owned enterprises; agricultural sector: lagging regions,
mainly small farms; outdated bank sector promoted capital gaps.
 In 82: NATO membership;
 Pragmatic, orthodox monetary and fiscal policies:
 EC accession in 1986

2. Portugal
 Two accession requests were rejected (1961 and 1970), and finally in 1977 the third
requested was accepted, for which the signed the accession treaty in 1985.
 1975-1986: EC accession negotiations
 Breakdown in economic policy, huge external dependency, population with poor
living conditions, lost of the colonial market.
 Portugal and the EC:
 Inequalities between regions: uninhabited interior with aging population, large
concentration of young people on the coastline and rural areas left behind since
urban areas growing fast.
 Economic challenges:
- much severe demographic problem than in Spain
- low productivity of labor (lose of competitiveness)
- Tourism boom: it became one of the biggest contributors of the GDP
- Public and external debt: very volatile.

3. Greece
 Support to the accession:
  Pro EC: New Democratic Party (Nea Demokratia)
 Opposed: Socialist Party and KKE Party
 Fear: it would exacerbate the country’s economic and political dependence to the EC.
 1955-1973 “economic miracle”: sustained GDP growth, reduction of inflation and
unemployment close to 4% (very low).
 Financial support from the US (Marshall plan); industrial, tourism and services
industries production grew rapidly.
 1960s: The EC became Greece’s main economic partner
 1967-1974: AA suspended (because of the dictatorship): only democratic counties could
join the European Integration.
 1973-1974: Oil price shock change everything
 Sharp recession, while inflation increased which went from around 5% to over 25%
(it remained above 10% for the next two decades).
 1979-1981: Second oil price shock
 Blow both, the economy and electoral chances of New Democracy.
 Debt-to-GDP ratio began to expand as the government borrowed heavily to
finance its populist programme of state spending: mainly for wage and pension
increases for civil servants.
 Greece accession to the EC:
 Pre-accession period was needed to stabilize economic and social indicators.
 Dispute over Cyprus between Greece and Turkey.
 Consolidation of the legitimacy of the state on the domestic and international
stages (support for democracy)
 Economic problems: low GDP (50% below EC average), high unemployment.
- Fear from EC: cheap labor would seek to escape the chronic
unemployment level at home in EC countries.
- The commission proposed a transitional period of 7-8 years.
 Agricultural products: olive oil, wine, fruit and vegetables → threatened to
compete with products in Italy and France.