Ireland and the financial crisis What factors compelled Ireland to apply for a euro rescue package? According to a study conducted by the Institute of Economics (FGN-HSG) it was the financial crisis that triggered the country’s financial difficulties. 12 December 2013. In the study, a group of researchers led by Prof. Dr. Manfred Gärtner asked what factors drove Ireland to petition for a euro rescue package. This question is becoming increasingly controversial because until the real-estate and financial crisis of 2008, Ireland had had Europe’s highest income growth rate, had joined the top group of per-capita income countries and had been regarded as a paragon of fiscal policy. Also, after two decades of consistent debt reduction, Ireland had one of Europe’s lowest debt-to-GDP ratios (25%) and reported black budget figures. The paper narrates Ireland’s odyssey through the crisis against the background of a data-based model of the government bond market. The central results of the study are these: • The major trigger and driving force behind Ireland’s budget and debt problems was the financial crisis of 2008, which threw the government’s finances into turmoil. Labels such as “debt crisis” and “euro crisis” steered the diagnosis of the problem in the wrong direction. While academics, the media and politicians were focused on the falsely-labelled causes for the crisis, it led further discussion and most political efforts in the wrong direction, whereas the real underlining problems which had triggered the financial crisis and are still fuelling it now, continue to be paid too little attention. • Ireland’s experience underlines the fact that the mantra of countries living “beyond their means” covers up what actually causes the problem. No industrial country is able to provide evidence of a comparable determination, wealth of ideas and political consensus regarding a reduction in government debt that was deemed unsustainable. Yet Ireland’s reduction of the debt level from 110% to 25% of the national income did not suffice to keep the financial markets quiet, nor to prevent Ireland from becoming a victim of the financial crisis. In view of this experience it remains baffling why austerity and debt limits were able to gain the status of a miracle cure for crises emanating from the financial market. • If we take the impact of countries’ economic and financial situations on their interest rates and ratings that have been observed among OECD members since the turn of the millennium as a yardstick, then the impact of the financial crisis on Ireland’s public finances should not have triggered the observed panicked reactions in the government bond market. • Ireland’s rating by all the leading agencies is striking. It is far removed from any empirical patterns that can be derived from data for earlier years and other countries. In a market in which multiple equilibria and self-fulfilling prophecies loom, excessive downgrades and an apparently hyperactive stream of rating events constitute particular hazards. Every bad item of news, whether justified or not, may trigger or accelerate a crisis and initiate a self-propelling process in the direction of sovereign bankruptcy.