1. Ireland's membership in the EU contributed to its 2008 fiscal crisis in several ways. The introduction of the euro in particular led to low interest rates that fueled a property bubble in Ireland through reckless lending by Irish banks. Political mismanagement exacerbated the situation. 2. When the global financial crisis hit in 2008, Ireland was vulnerable because it could no longer independently set interest rates or print money as an eurozone member. To prevent a banking collapse, the Irish government issued an unlimited bank guarantee that ultimately saddled taxpayers with the banks' debts. 3. The EU and ECB response has also hindered Ireland's recovery at times. Bailout terms have been criticized as unfair compared to other countries like

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Course: PAI 7006
Lecturer:Dr. Muiris MacCarthaigh
Date:10/05/2013
Student number: 40093039
Word count: 2000
In what ways did Ireland’s membership of the EU contribute to its fiscal crisis beginning in
2008, and the attempts to resolve it?
Introduction
Ireland’s membership of the European Union has contributed, along with other important factors,to
the huge fiscal crisis in 2008 which has brought the Republic of Ireland into one of its most difficult
periods since political independence from the United Kingdom in 1922. Our fiscal crisis is unique due
to the many different circumstances in play here. One of these circumstances is the role which the
European Central Bank has played in the crisis and also in the efforts since, in trying to resolve it.
This article examines some of the key EU financial decisions which were made prior to the Irish crash
in 2008. It will then investigate the EU’s role in Ireland’s attempts at recovery. It seeks to illustrate
that whilst political mismanagement, corruption at large banks and regulatory negligence were key
issues in the Irish crisis, flaws within the EU financial system were also to blame. These same flaws
have seen Ireland receive unfair treatment from the ECB in comparison to similar struggling bailout
countries such as Greece and Cyprus. This unfair and unequal approach has hindered an Irish
recovery and infuriated many within Irish society.
European Financial Crisis and Irish Crash
The seeds of one of the biggest banking collapses in world history, which led to the down fall
of the Irish state,were set early in the late 1980s. These seeds developed with the aid of European
integration throughout the 1990s and fully blossomed in the early months of 2008. This particular
crisis origin’s is in the Maastricht Treaty of 1992, which introduced the pillar structures and many
other new approaches within the EU (Official Journal of EU,1992). It also included a range of new

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financial criteria which when signed and applied would allow Member States access to the third stage
of the new Economic and Monitory Union of the European Union. These new financial criteria ranged
from restrictions on government finances, implementation of common exchange rates and
curtailments on Member States inflation rates before an agreed deadline (European Council, 2012).
Ireland, after a 69% referendum vote in favour of the Maastricht Treaty, signed it into law in 1992. In
that year,Ireland also joined the EMU. The EMU, a design which had been planned since the 1970s,
was established in 1994 with the creation of the European Monetary Institute. This institution was the
first phase of the implementation of the ECB to the EU. The EMU developed slowly thought those
years until in 1998 it was almost completed. In the early stages of its development it made important
decisions such as the name of the common currency to be used by Eurozone members in 2001, the
decision to implement the widely irrelevant ‘Stability and Growth Pact’ and the decision on the
common conversion rates of all selected eleven Member States who were about to join the Eurozone
currency. The ECB introduced the common Euro currency and its financial rates to the world
financial markets in 1999 and the currency came into widespread circulation throughout the Eurozone
member states in 2002 (The European Central Bank, 2004).
With entry into the third stage of the EMU and adoption of the Euro currency the ECB now became
the main banking institution in Ireland and throughout Europe. The Irish Central Bank no longer
could set its own individual interest rates or print money to deal with rising levels of inflation within
this country as it had done on the past. We were tied to the rest of Europe in this respect. I believe that
this was one of the reasons why Ireland’s economy crashed so badly in 2008. We lacked the means to
take significant evasive action after the politicians realised the catastrophic path they has put us on.
At the time of introduction of the euro in 2002, the French and German economies were almost
stagnant. Growth was low and their economies badly needed a boost to create growth and
employment. The ECB decided to lower the common interest rates throughout the Eurozone in order
to allow for a boost to its larger Member States. In principal this was a smart idea, it would create
cheap money which would allow for banks and other institutions in Germany and France to lend
money to its public in order to develop jobs and ultimately create economic growth. However,whilst
this was an ideal situation for both France and Germany, Member States like Ireland, who did not
need this economic boost, was now receiving large volumes of this cheap finance from its large
financial services sector. The effects of this were amazingly destructive in Ireland. Its already
booming economy became overheated and very vulnerable. Political mismanagement of the situation
made it much worse. Mike Aynsley the current CEO of the IBRC who is tasked with shutting down
the disastrous Anglo Irish Bank supports this opinion. He has stated that “Ireland’s property boom
was fuelled by cheap money which was made available after Ireland joined the EMU”
(www.businessandfinance.ie, 2010).

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Prior to this decision by the ECB, Ireland was a country which had focused on export orientated
growth. Tough economic decisions implemented by former EU Commissioner Ray MacSharry when
he was Minister for Finance in the late 1980s stabilised Ireland’s bad recession and what followed in
the 1990s was a decade of hard earned and well deserved economic growth and prosperity led by the
Fianna Fáil government. This growth and development was headed by the ‘dot.com boom’ and direct
foreign investment from US pharmaceutical companies and IT industries. This growth developed
throughout the country and by the time 2002 arrived, Ireland’s economy was one of the best
preforming economies in the EU.
From 2002, and with this cheap finance been provided by the ECB, Ireland’s huge financial sector
began looking at ways in which they could invest this cheap money in return for large profit gains in
later periods. They began doing this without much banking regulation from the ECB or from the Irish
banking regulator Patrick Neary who has been mentioned by Mike Aynsley amongst many
commentators to have been ‘asleep at the wheel’ (The Irish Examiner, 25 March 2010) . Although it
must be noted that there was criticism of Ireland’s economic decisions coming in from other EU
finance ministers, they just were not listened to. In fact I can recall Charlie McCreevy’s comments
about how for 700 years the Irish didn’t take being dictated too kindly and that he was not in position
to listen to EU criticism, especially when his country’s GDP% was something to be admired.
The banks began to recklessly lend billions of Euros to many different sectors throughout the country.
They leant over and beyond their capabilities which was an irrational practice for any banking
institution to do. The construction industry was the main recipient of this funding. Political negligence
and in particular property-based tax incentives and corruption in planning practices throughout the
country led to a property boom and a bubble being created which the government became reliant on
for revenue as it continued to increase its levels public spending. It must be noted that in Ireland at
this period there was a vicious circle in place, or a golden circle as it became known. The main
political party and its representatives in the Dáil were funded by large political donations from even
larger construction developers. Their ideas and aspirations were fed onto the political elite and the
construction boom which followed became principal in the governments development decisions. One
look at the doomed National Spatial Strategy of 2002 would point to evidence of this. In this strategy,
the government called for the construction of thousands of new houses and other developments which
the population could simply not fill at the current rates of births.
This construction boom which was fuelled by cheap European money engulfed the entire state. In
construction, rural and secluded areas such Leitrim and Sligo saw developments of thousands of new
construction projects, many of which are lying empty today. Also many citizens jumped onto the
housing ladder at a time when inflation was at its highest. This meant that buyers paid large amounts
for relatively standard properties. But it was ok, the well-funded Irish banks were offering 100%

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mortgages to people in need. They were even offering funding for house contents along with that.
With this construction boom spiralling out of control and the economy begin to show signs of
meltdown the Irish government was still showing no signs of cooling the economy.
The whole economy and the property bubble which it was reliant on were slowly crashing. However,
it suddenly burst in 2008 when European and world markets were rocked by the sudden credit crisis at
Lehman brothers and Goldman Sachs. Because of this international crisis, world financial markets
were thrown into a state of chaos. Dr. Alan Ahearne,a former senior advisor to the Minister for
Finance Brian Lenihan has stated that “ Irish banks had made a lot of loans , but they had got that
money fromthe USA and Europe and that money was now shifting back out to these places in the first
instances of the global financial crisis” (Kydland and Wynne, 2006). Irish banks were now in a
perilous position. The government needed to stop the run on the banks which was occurring daily.
So acting in good faith and in order to stop the run on the banks which could have brought the Irish
banking system down, in September 2008, the Irish government issued every bank and financial
institution in Ireland with an unlimited bank guarantee. This one swift legislative move saw Ireland
and its citizens go guarantor for the banks and its multiples of billions in losses. This was a risky
move, but it was supported by the ECB who seen it as an effort to stabilise the European banking
sector. They did not see the necessity in distinguish between the good banks that had just got into
difficulties and the bad banks who had been acting criminally and negligently. Nonetheless they had
acted for the benefit of the country with the support of the ECB. However,if the banks were to fail in
the face of further European financial turbulence it was now the Irish state who would be responsible
or the debt. And as we know too well here in Ireland, this is exactly what happened. Again
exogenous factors resulted in a crisis for Ireland.
But what would happen now? The figures were too large for the Irish state to bear. Jürgen Stark a
former chief economist with the ECB during the crisis has stated that “The Irish financial sector
became extremely large, extremely huge.It was five times the GDP of Ireland, and in the case of an
accident,the Irish government could not rescue the banking system” (The Irish Times, 19 February
2013).
EU’s Roles in the Attempts to Resolve It
Enter the ECB, the International Monitory Fund and the Troika to the Irish fiscal crisis. It was
estimated that 60 billion Euros was needed to secure the Irish banks. 31 billion Euros alone was
needed for Anglo Irish Bank. The ECB which was already keeping Ireland’s government finances on
life support with cheap low interest loans now had to make an important decision. The Irish
government debt crisis threatened German, French and UK institutions with holding s in Irish
government bonds and contagion was a big fear for the European elite. Jürgen Stark has stated that

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“there was a real need to intervene. There wasa clear risk that Ireland was about to be cut off from
the financial markets triggering an immediate default” (The Irish Independent, 22 November 2011).
The Irish government was forced to enter into negotiations with the international assortment of
investors. These talks brought about an 85 billion Euros bailout package for the Irish state. In the
negotiations, Brian Lenihan tried to inflict some of the pain onto private investors who had bought
bonds in Anglo Irish Bank. He believed that this would claw back billions for the Irish tax payer. This
term is known as ‘burning the bondholder’. However the ECB and the Troika were totally against
burning the senior unguaranteed bond holders in Ireland, they apparently feared for knock on effects
that this would have in the rest of the Eurozone and the other EU economies. The IMF however did
support burning bondholders in failed banks. Aiji Chopra stated that “They saw it as bondholders
sharing the burden with the Irish tax payer” (www.thejournal.ie, 28 November 2011). The Irish
government chose not to follow the advice from the IMF and instead toed the line with the ECB and
its economists despite it being a bad deal for Ireland and a bad deal for the Irish tax payer. The results
of this were that because of an ECB and Troika decision, the Irish state now had to pay out billions of
Euros to the senior unguaranteed bondholders who funded the reckless practices of Seán Fitzpatrick’s
Anglo Irish Bank.
This decision and the overall effect of the economic crash caused great anger in Irish society and in
2010, the Irish electorate stuck with a decisive blow. It totally obliterated the Fianna Fáil and Green
party coalition. This was to be expected considering what had occurred. In stepped Fine Gael and
Labour to take the reins of the utter chaos. Both parties had gained ground by making pre-election
promises about getting a deal from the ECB on allowing for some burning the senior bond holders.
Can you recall ‘Frankfurt’s way or the Labour Party’s way’? Unfortunately, the ECB had no intention
of changing course and refused any negotiations on that aspect of the deal. They instead praised
Ireland for the austerity measures it was implanting and for reaching its readjustment figures in line
with the bailout program. Ireland continued to implement spending cuts and also to pay over three
billion Euros a year to these ECB supported bond holders. We were seen as the poster boys of the
bailout countries for doing so.
The real sting in the tale to this ECB bailout scenario for the Irish people came two years later in June
2012. When despite failing to: meet budgetary targets, implement austerity measures and generally
lacking the political will to address the changes required, Greece received a second ECB-IMF bailout
which included large amounts of burden sharing by senior bond holders of Greek government debt. It
went totally against the rules which Ireland was forced to abide by. Why did the ECB make one rule
for one country and not for the other? Especially after Ireland had been implementing the required
austerity measures and following the ECB program. What is also troubling about this decision is that
it has also been applied to Cypriot bank bond holders in their recent ECB bailout deal. Where is the

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equal fairness from the ECB? Moving the payment thirty years down the line does not disguise the
injustice and raw deal which Ireland was dished up by Europe’s elite.
Conclusion
Throughout this short chronological examination of the key events in the Irish economic crash
I have attempted to explain how Ireland’s position within the EU along with other factors contributed
to the fiscal crisis of 2008. Increased European integration, the decision to join the Euro currency and
tie the country’s finances to a common centralbank all had disastrous effects on our economy in the
years which followed. A separate source of frustration for many Irish citizens has been the heavy
handed approach taken by the ECB in dealing with Ireland’s efforts at resolving its fiscal crisis.
Especially when compared to other bailout states and the deals they have received from the ECB.
Overall I still question the ECB’s motives with government ministers and representatives when I meet
with them around Dublin. Their responses are simply not good enough in my opinion. As a nation we
need to stand up to the ECB and the banking institutions and its culture which have led us down this
horrible economic path. We need to ensure that this situation never occurs again. Even in the face of
greater European Integration.

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Appendices
(Figure 1.) Eurostat table indicates the level of debt in comparison to other EU countries which
Ireland undertook in the bank bailout of 2010.

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Bibliography
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burn-senior-bondholders-291729-Nov2011/)
Kydland, F. Wynne, M. "Ireland's Great Depression, Economic and Social Review”,(Vol. 37, No. 2,
Summer, 2006).
O’Donovan, D.,“Ireland the 'role model' forbailout countries” (The Irish Independent, 22 November
2011) Available at: (http://www.independent.ie/business/world/ireland-the-role-model-for-bailout-
countries-26794511.html).
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