Bertie Ahern: The Man Who Blew the Boom: Power & Money (47 page)

The failure at the Government level was accompanied by the spectacular failure at the banking and supervisory level, as well as by that of the civil service generally. The performance of international bodies such as the
OECD
and the
IMF
was patchy. Although some did strike occasional warning notes about what was going on, in general the criticism was muted, and it was accompanied by other commentary of praise for, and even awe at, the Irish performance.

According to Greg Sparks, a Taoiseach and a Minister for Finance need to be ‘apart from as well as a part of.’ He meant that they should at all times be standing back from what is going on, even if it is their own work, and questioning its wisdom. He doesn’t think that Ahern, McCreevy or Cowen did this during their periods in office. ‘I think they listened to their own propaganda.’ Criticism was not invited and was sometimes nastily repulsed. When John FitzGerald and some of his colleagues in the
ESRI
warned about the dangers of the Government’s fiscal policies in 2000, McCreevy dismissed them as ‘pinko-liberals’. A few days after the comment, Ahern, during a trip to a meeting of the Irish Management Institute in Cork, referred to a kind of ‘creeping Jesus’ who was always criticising Government policy but had been shown to be wrong. Some commentators

always want the glass to be half empty . . . Provided we maintain our discipline, we will have great pleasure in confounding the pundits in the City of London, Brussels and Frankfurt, who, blinkered by orthodoxy, still cannot quite understand how the Irish, of all people, have managed to get it right.

The nationalism involved in the response is interesting, but what is most important is that this was the Taoiseach and leader of Fianna Fáil responding to considered comment by senior members of the organisation set up by Lemass to provide continuing analysis of economic policy.

In March 2001 the
ESRI
published a paper by John FitzGerald entitled ‘Fiscal Policy in a Monetary Union: The Case of Ireland’, in which he said that in a monetary union the handling by a government of its finances—fiscal policy—can affect wage inflation and the allocation of resources within an economy. By the latter he meant that money and economic activity can be directed towards or away from particular sectors.

For example, fiscal policy can have a significant effect on the domestic housing market through changing household disposable income and through changing the cost of capital for homeowners. The tax treatment of interest payments on house loans can have a big effect on the cost of capital for homeowners. Because the legal instrument under which the mortgage lending takes place is country specific, the taxation or subsidisation of mortgage interest payments is not affected by the country of residence of the financial institution making the loan.

By the latter point FitzGerald was saying that, although banking was becoming more international, it was still possible to use the treatment of mortgages—which were specific to countries—to affect housing. Because of monetary union, the rate of interest charged was no longer under the control of the Central Bank. But, instead of the Central Bank raising interest rates to calm the housing market, the Government could alter its treatment of mortgage interest payments and have the same effect.

To date the fiscal policy instrument has not been used actively in Ireland to reduce demand for housing in the current boom. It remains possible for the government to eliminate interest relief on mortgage interest payments in the income tax code. In addition there are a range of other fiscal measures that could directly reduce demand pressures in the building sector.

FitzGerald’s suggestions that taxation be used to calm the housing market and that special tax incentives for building be removed were of course not listened to.

For Laffan, the concern that was created within the European Commission about the management of the economy by McCreevy’s policies in the period before the 2002 general election never went away. Asked for her view on how we managed the transition to becoming a member of a single currency, she gave a stark reply.

We didn’t. We didn’t take on board the fact that as a member of a single currency we had fewer instruments and levers in terms of our economy: we didn’t have devaluation to regain competitiveness. Given the state of the German economy at the time, we were likely to have a low interest regime, and we had a booming economy, and we didn’t understand [the consequences of this]; or if we did we ignored it because it made political sense to ignore it. We continued to behave as if we weren’t in a single currency, and the consequences have been disastrous.

They didn’t sit down and think. It would have required Finance to put on paper to the cabinet about what being in a single currency means. Did they do that? I suspect not. I doubt if McCreevy was in that mode. I don’t think McCreevy saw a constraint. I think he saw: reduce taxes. He was very much at the liberal end in terms of his economic philosophy and outlook. I think he was [in favour of] less state, less regulation, and let the country fly. You know, capital gains tax, he really was very pro-enterprise in an extraordinary way. So I can’t imagine he ever wanted something to go to cabinet saying ‘Constraint, we need to tie our hands behind our backs.’ I can’t see it.

Laffan said that when interviewing senior civil servants throughout the departments in the late 1990s she formed the impression that there was something wrong with the Department of Finance, and she reported her view to the Department of the Taoiseach. She felt it was a department that was not performing as well as it should. One of the surprising aspects of the department that came into focus after the collapse of the economy was the absence of any serious research component. Laffan contrasted the department’s brainpower with the finance ministries of other European states, where large numbers of economists at the PhD level and higher conduct research on the economy that their department is managing. Indeed, a number of economists and social researchers spoken to by the present writer in the period since the crash mentioned this failure to encourage research, and not only by the Department of Finance. Amazingly, industrial relations issues may in part be behind the phenomenon, as the grading structures that operate do not allow highly qualified economists and social scientists to be paid at rates approximating what they might get outside the public service.

However, it is difficult not to believe that there may have been political reasons for this failure of management, ones relating to not wanting a civil service that would challenge its political masters. Certainly there is a widely held view that independent views were not encouraged in the Department of Finance, or elsewhere in the public service, during the Ahern years.

Pat Rabbitte is of the view that the rapid increase in the rate of pay of the state’s senior civil servants might have softened them and in an indirect way prompted them to acquiesce in the unwise economic policies being pursued by their political masters.

It worries me if you look at it now that Alan Aherne writes a few articles in the
Irish Times
and the next thing he’s the chief economic adviser; Peter Bacon is in charge of banking; Colm McCarthy is in charge of public expenditure. You are almost driven to the conclusion that if you are an economist it’s not safe to walk down Merrion Street or someone will grab you and drag you into Finance and give you a job. What the fuck were they doing before this?

Laffan, for her part, says that the Irish interaction with Europe has been mixed and that some aspects of how we engage with Europe are very successful. She does not believe that the performance-possessor explanation offered by Prof. Lee in
Ireland, 1912–1985
is an accurate or full one. ‘It is too much of a silver bullet,’ she said. The fact is that there has been excellent performance in some sectors, notably in relation to industrial policy and the attraction of foreign investment but also in relation to many of the ways in which Ireland has interacted with Europe.

What is clear is that Ahern’s period as Taoiseach, and McCreevy’s period as Minister for Finance, followed by his period as
EU
Commissioner, coincided with a change in the European view of Ireland as a ‘good European’. In April 2011, during a visit to Dublin, the
EU
’s most senior civil servant, the Irishwoman Catherine Day, who is the secretary-general of the
EU
Commission, said that the ‘shine’ had gone off Ireland in Europe and that it had lost the good will that had formerly existed. ‘The perception is that the more prosperous Ireland became, the more arrogant it became, and the less it engaged. It shouldn’t be a fair-weather engagement.’

Blair Horan said that when he is abroad meeting colleagues in European civil service trade unions, he encounters annoyance that Ireland, having been allowed into the euro club, went on to mismanage its affairs at a cost to the club generally.

Ahern and his Governments did not seem to understand that the management of a boom and the transition to a single currency involved a new and substantial challenge for political leadership. He did not seem to understand that because of the one-off and historic nature of what was occurring there was an onus on him to devise strategies that would make the most of the opportunity he had inherited. He appears to have been fixated on short to medium-term growth but to have had little by way of interest in how growth could be used to establish an optimum medium to long-term environment for maximising the well-being and potential of Irish society.

Laffan sees an explanation for this in the struggles that dominated public life during Ahern’s early political career. When he became Taoiseach he did not see his role as bringing the country to the next stage.

I suspect he thought he
had
brought it somewhere. He had inherited an economy in very good nick in 1997. I mean the rainbow Government . . . Ruairí Quinn turns out to be the last good Minister for Finance we had. I think Ahern thought we had arrived.

  EPILOGUE

KESHCARRIGAN

On the day I went from Dublin to Co. Leitrim to have a look at housing developments there, the Met Office was warning of an impending period of unusually cold weather. Snow was expected by the weekend. On the radio all the talk was of the external financial assistance that Ireland was receiving from Europe and the
IMF
, the extent of the loss of sovereignty involved and the role that Ireland’s finances were playing in the crisis buffeting the euro and the
EU
. Anger and dismay among the public was such that Fianna Fáil’s popularity ratings were falling to levels where its continued existence had become a topic of conversation. Bertie Ahern’s place in the history books was going to be very different from the one he had dreamed of.

I pulled in near Enfield, at the new motorway stop on the
M
4, for a late breakfast and a look through the morning newspapers. When I was getting up to leave I was greeted by a former multi-millionaire publican and hotelier sitting at a nearby table. We’d met down at the courts when his businesses were being put into receivership by the banks. It was a cold day, we agreed, but beautiful too. He was heading to the west.

On the road between Longford and Carrick-on-Shannon I got my first glimpse of boom-time housing estates built on the edges of towns and villages. For some reason a type of ice-cream yellow was the colour of choice. The houses were large, and the estates in the midst of the otherwise monotonous grey-green countryside looked like some alien crop that was threatening to grow out of control. Every now and then I passed a would-be mansion adrift in a field, the site abandoned, the structure half built and open to the rain and the wind.

I’d chosen Carrick-on-Shannon because of what Ruairí Quinn had told me about his surprise at being asked, during a visit there when he was Minister for Finance, whether or not he would grant special tax designation status to the whole county. In the town I met the local estate agent Liam Farrell of
DNG
Farrell, a brother of Pat Farrell, the chief executive of the Irish Bankers’ Federation and former general secretary of Fianna Fáil. We met in Liam’s office looking out at the Shannon in a new development alongside the Landmark Hotel. He remembered the meeting with Quinn and what he said was a more encouraging encounter with the then Taoiseach, John Bruton. What you have to remember, he said, was the economic situation at the time in Co. Leitrim. ‘It was appalling.’

The county was a poor backwater known for bachelors and suicide. The only thing going for the county at the time, according to Farrell, was that its young people had the highest per capita involvement in third-level education. ‘It was a meal ticket out.’ Such organisations as the Irish Farmers’ Association, the chambers of commerce and the business community generally felt that Co. Leitrim was being overlooked by the Government and was in need of a fiscal stimulus.