Introduction: the challenge to national political economies

As the last chapter demonstrated, Ireland was one of a group of countries that faced a very unpromising set of conditions for managing the financial flows, credit booms and economic bubbles that were likely to emerge in the Eurozone. Along with the UK and the Mediterranean countries, Ireland lacked the social compacts that underpinned fiscal discipline in the Continental and Nordic economies. However, this does not mean that the fiscal crisis that emerged rapidly in Ireland in 2008 was inevitable. National politics still played a key role in explaining the pace and extent of the crisis and how it transferred so quickly and dramatically from the financial sector to the public finances. Indeed, national political economies may matter even more in an era of economic and monetary union, given the fairly strict constraints in the areas of monetary policy (Lane, 2011). Weakened in some areas, national politics became ever more crucial in others such as fiscal policy and the shaping of investments towards productive rather than speculative ends.

Ireland therefore faced a significant challenge of managing the process of financialisation in the context of institutions and social bargains that are typically associated with relatively large budget deficits. However, although in the 2000s Ireland ran budget surpluses and its public finances seemed in healthy order, the scale of the collapse of its public finances after 2008 was dramatic. Its budget deficit grew from 0.9 per cent to 15.5 per cent between 2007 and 2011. As will be shown in the next chapter, a significant part of this is due to the public finances bearing the burden of private bank debt. However, even leaving this aside, there was a significant ongoing primary deficit in the government’s annual budget. Understanding the conditions that could produce such fiscal fragility is a critical element in understanding the Irish collapse.