Abstract

 Will Ireland share the fate of Iceland? Is this open, small economy with a debt-to-GDP ratio of above 130% on the verge of bankruptcy? Economists argue that if public debt is greater than national income, then smaller economies, heavily involved in the international division of labor are at risk of becoming insolvent. The bankruptcy of Ireland, whose prosperity is based on its reputation for being a good place to do business, could be a catastrophy. Contrary to the countries of southern Europe, the economy of the Green Island has never had problems with paying its liabilities and with solvency. While Greece has gone bankrupt five times since gaining independence in 1826 and Spain as many as thirteen in the past two centuries, Ireland's history in this area is impeccable (Reinhard, Rogoff, 2009, p. 3-6). Since the beginning of the 21st century Ireland's economic development has been based mainly on construction industry and not exports, as it used to be in the 1990s when the country was nicknamed the Celtic Tiger. The boom resulted in a budget surplus and a positive balance in current settlements. But it also resulted in higher prices - the Irish no longer had to accept slow wage growth to stay internationally competitive - which, combined with the low nominal interest rate of the European Central Bank, provided fertile ground for the build-up of the real estate bubble. The aim of the article is to identify the factors that led Ireland to the brink of bankruptcy and to try to answer the question whether the action of recapitalization of failing banks by the government and international financial institutions will bring the expected results in the form of healing the financial system and returning Green Island to the path of economic growth.
Highlights
The bankruptcy of Ireland, whose prosperity is based on its reputation for being a good place to do business, could be a catastrophy
Since the beginning of the 21st century Ireland's economic development has been based mainly on construction industry and not exports, as it used to be in the 1990s when the country was nicknamed the Celtic Tiger
There was an allegation that the level of inflation exceeding the reference values puts this economy in a privileged position in the context of development opportunities, due to it generating negative real interest rates (Under the conditions of monetary integration, this allegation has a much broader dimension, as a higher inflation rate at a given ECB reference rate may lead to conflicts between the members of the EMU against the background of unequal benefits obtained from participation in the common currency area in the context of disproportionate costs associated with maintaining a low level of prices)
Summary
JELL Clasification Codes: F340, H620, Key words: Ireland, housing bubble, public debt, budget deficit, moral hazard. There was an allegation that the level of inflation exceeding the reference values puts this economy in a privileged position in the context of development opportunities, due to it generating negative real interest rates (Under the conditions of monetary integration, this allegation has a much broader dimension, as a higher inflation rate at a given ECB reference rate may lead to conflicts between the members of the EMU against the background of unequal benefits obtained from participation in the common currency area in the context of disproportionate costs associated with maintaining a low level of prices). Another very important conclusion drawn from the data analysis concerns the significant disproportions in the levels of inflation among the members of the EMU, which precludes the effectiveness of the single monetary policy implemented by the European Central Bank
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