Bust warning signs ‘flashing since 2001’

The warning lights about the Irish economy were flashing for up to decade before the crisis struck that has turned the country into one of the most indebted in the world.

Some commentators read the signs and tried to raise the alarm, but it was ignored by the government and missed by most economists.

Ten key indicators intended to act as an early warning system to all EU countries show the extent of the problem.

Designed to force countries to take evasive action in future, they look back and offer a lesson showing that the countries now in trouble — Greece, Portugal, Ireland, Italy and Spain — had problems then also.

From 2001, the figures show the country was heading in the wrong direction.

“If the signals were picked up in time, we would not be where we are today,” said chief economist with the ESRI John FitzGerald.

It shows that the country was losing competitiveness when the level of imports began to rise compare faster than exports.

“This was a key indicator and the ESRI raised this especially from 2003.”

However, the government was taking in more money than it was spending, and this red light was missed.

The corrosive effect of the building boom and its related borrowing began to be reflected in figures from 2000, when domestic banks started to borrow more abroad because they could not keep up with the demand at home for loans.

The country’s manufacturing and service industries were losing competitiveness internationally from 2002 as builders had to pay scarce workers higher wages and this fed into a gradual spiral of pay and prices for goods.

It led to the country’s share of world exports slipping from 2003. “This reflects the loss of competitiveness, caused by the building boom which acted like a cancer, putting pressure on everything in its path,” said Mr FitzGerald.

House prices were rising dangerously fast and high, as was the rate at which people were borrowing and running up debt — growing by a quarter in 2002 compared to the previous year. In 2008 as the crunch hit, people borrowed even more, 40% compared to 2007.

The country appears to have come full circle now from having the third highest government debt in 1995 to having one of the lowest by 2006. But once again is in the top three, behind Greece, Italy and Portugal and on a par with Belgium.

The unemployment rate, where Ireland had the third worst in the EU in 1996 and one of the lowest rates in 2002, once again ranks in the top six.

Olli Rehn, the economics commissioner, said that he hoped in future these indicators would pick up advance signs of danger for countries’ economies. The figures will then be analysed in more detail and if there is a real danger, the commission will recommend a strategy to change course.

As part of the EU’s new oversight role on member states’ economies, four countries were warned that they could be developing housing booms — Sweden, Denmark, Slovenia and the Netherlands.

Britain, France, Finland and Belgium were warned of losing export market share, and rising debt.

Italy was warned over its high public debt and low growth while Spain’s high unemployment was posing a big problem too.