The Irish standard of living between 1960 and 1990 changed little relative to the average of the EU 15. Measured in terms of GDP per head (GNP for Ireland), adjusted for differences in the cost of living, Irish living standards in 1960 were just over 50 per cent of the average of what is now the EU 15 (Figure 1).
The Irish relative position showed very little change between 1960 and 1990, in spite of EU membership and a major inflow of foreign investment, so that in 1990 GNP per head was just over 60 per cent of the EU average.
By contrast, in 1960 the UK standard of living began at about 120 per cent of the EU average in 1960. It fell gradually over the subsequent 20 years, stabilising at roughly 100 per cent of the EU average in the early 1980s.
However, behind the unchanging relative standard of living of Ireland over the period 1960 to 1990 lay a more complex story. Output per worker was slowly rising over that 30-year period, reflecting significant growth in the economy.
The Irish birth rate had been high until 1980 and, as a result, those adults who were working had to support many dependents out of their income and their taxes. It was only towards the end of the 1980s that the falling birth rate began to reduce the burden of dependency.
After 1990 the combination of a rapidly declining dependency rate and a major acceleration in productivity growth saw the Irish standard of living converge on the EU average in an exceptionally short space of time. (There are few other examples of such a rapid convergence in living standards in recent history.)
Having reached an EU average standard of living by 2002, the economy continued to grow rapidly until 2007. This growth spurt in the 2000s was, as we now know, unsustainable, but it took the Irish standard of living temporarily well above that of our EU partners.
The fact that Ireland’s standard of living in 2007 was 13 per cent higher than that of the EU 15, and 10 per cent higher than that of Germany, coloured the initial reaction to Ireland’s woes when the great recession began. German media were particularly struck by how much better paid were Irish public servants relative to their German counterparts.
In the early years of the crisis, for countries such as Germany and France, the fact the Irish standard of living had exceeded that of their own citizens meant there was a natural reluctance to take on any of Ireland’s burden. To ask German or French citizens to pay more to bail out a rich neighbour, when they were themselves suffering a significant loss of income, was a big ask.
In the event, our EU colleagues provided the necessary loans to allow Ireland to weather the storm. However, there was a clear understanding the Irish economy was not broken and it would recover and eventually repay the loans. As a result, the bailout would not burden the citizens of countries such as France and Germany that were worse off than Ireland before the crisis began.
Unfair tax practices
The reaction to Ireland’s financial collapse was also affected by the perception that Ireland’s growth had been achieved at the expense of its neighbours through unfair tax practices. While this was really not the case, nonetheless it surfaced as an issue when Ireland sought support from some of its euro zone colleagues.
Table 1 shows the position as it was in 2013, the latest year for which comparable data are available. In spite of the fall in income as a result of the crisis, the Irish standard of living was then similar to that of countries such as France and the UK, and also similar to the average for the EU 15. Because of the relative success of Germany in weathering the crisis its standard of living was about 12 per cent above the average.
It now looks likely that Ireland will grow more rapidly than the EU average for another few years. If this happens, once again, it would make Ireland one of the rich countries within the EU and also, of course, one of the richest countries in the world. Such a position will carry with it responsibilities and, hopefully, there will be no return to the hubris of the 2000s.
In limiting the damage to the development aid budget during the crisis, successive Irish governments have recognised Ireland’s long-term responsibility as a rich nation. Future economic success may well carry new international responsibilities.
Painful plight
These data also throw some light on the reaction of some euro zone countries to the painful plight of Greece today. For euro zone members such as Estonia, Latvia and Slovakia, their living standard is today no better than that of Greece. In the case of Estonia and Latvia, because they were not members of the euro zone when the crisis hit them in 2008, they did not have the same access to EU loans as we did. As a result, they had to undertake a much more rapid and painful adjustment process in 2008 and 2009 than was the case subsequently for Ireland, Portugal or Greece.
Now, with the need to provide further assistance to Greece, they will have to ask their citizens to support the provision of more loans on favourable terms. If Greece were unable to repay its debt, they would suffer a significant loss, something that would not play well with their relatively badly off citizens.
This helps explain the euro zone’s apparent lack of sympathy for Greece’s very real problems.
