Ireland effectively told the European Commission "don't bother us" when it was warned the economy was at grave risk of overheating seven years before its eventual nosedive, a top EC chief has said.
Marco Buti, the EC's director general for economic and financial affairs, said it was a mistake for the Irish Government to snub an unprecedented intervention in 2001 over fears about the direction Dublin was heading.
Before the Oireachtas Banking Inquiry, Mr Buti said the then Fianna Fáil/Progressive Democrats coalition ignored the "de facto early warning" against tax cuts and more spending at a time when Ireland was a "poster child" of the boom.
"It was a mistake, because it was not recognition that fiscal policy could play a more stabilising role," he told TDs and senators investigating events leading to the Irish banking crisis.
"It was an example of the type of reasoning which essentially says: 'we are doing so well, we are in surplus, just don't bother us'."
The warning from Brussels to Dublin in January 2001 was endorsed by the Council of Ministers and was the first time such a public reprimand had been issued.
"The government of Ireland did not implement that recommendation," Mr Buti said.
The senior Brussels official said the EC were courageous in issuing the warning - which proved to be right - as it went against the "group-think" of the time.
Furthermore, he was not surprised at the backlash from Irish political leaders as well as some academics.
"It was the right (decision), but I was not surprised by the push back because it went against the wind," Mr Buti said.
"Ireland was performing beautifully, the public finances were consistently healthy.... Why should the Commission come out and criticise the poster child?" he added.
"It was a courageous decision."
The recommendation, used for the first time under Article 99.4 of the Maastricht Treaty, ended up being the embryo of EC advice to countries on their fiscal policies, he told the inquiry.
Mr Buti also pointed to the role of the Financial Regulator "not paying sufficient attention" in the run up to the crash.
At the time, the focus was on the health of individual banks and not the stability of the financial sector as a whole, he said.
While the EC had a responsibility to intervene in fiscal matters, it was left to each country's regulator to oversee the banking system.
Asked if that was good practice, Mr Buti replied: "If you ask me now, I would say no."
Donal Donovan, a former deputy director with the International Monetary Fund, told the inquiry the organisation regularly warned the Irish Government about the threat of rising property prices.
It consistently urged measures to calm the market in the years running up to the banking crash, despite fears that it would be seen to be “crying wolf” every year.
Mr Donovan recalled “quite candid exchanges” from 2004 to 2006 between Irish officials and the IMF, where the Irish referred to “political likely insurmountable difficulties” in taking any action.
Dublin did not accept the warnings until 2007, when, he said, it was too late to do anything about it.
But despite the intervention, the IMF never predicted the scale of the collapse, he told the hearing.
“It is widely accepted, and it would be my personal view, that the IMF surveillance process failed in Ireland,” he said.
“Although some vulnerabilities were noted, the assessment by IMF staff gave no inkling that a disaster could be in the making.”
He added: “The extent to which a country’s economic and financial situation deteriorated so sharply and dramatically with minimal prior anticipation by the IMF – that is the Irish case – was, to my knowledge, probably unprecedented in the history of IMF surveillance.”
Mr Donovan said the IMF’s last “rosy report” on Ireland was in 2007.
The former top official said questions remain as to why the organisation had no formal contact with Ireland for two years after that, which he described as a significant flaw.