McCreevy: market discipline

A few days after his re-election as 43rd president of the United States, George W Bush dispatched his treasury secretary, John Snow, to Dublin to find out the secrets of the success of the Celtic Tiger.

Thanks to the publication last week by WikiLeaks of secret cables sent by the then US ambassador to Ireland, James C Kenny, the real views of "policy-makers and businessmen who were the architects" of the Celtic Tiger have emerged. During his two-day visit to Ireland, Snow attended a dinner hosted by Ulster Bank chief executive Cormac McCarthy and met with over a dozen politicians, business figures, trade union leaders and civil servants.

According to a lengthy cable sent by Kenny, the dinner was attended by Charlie McCreevy, who was soon to make his exit as finance minister to become EU Commissioner. McCreevy spoke about reforms introduced in the 1980s to help the economy recover. Getting the reforms through required "dictatorial" leadership, McCreevy is quoted by the ambassador as saying.

"This involved incentivising industries to achieve efficiencies by exposing them to the full discipline of the market, even at the risk of bankruptcies. The challenge in this approach, explained McCreevy, was to press ahead with reforms in the face of elections, which provided temptations for politicians to adopt softer, more populist economic platforms," Kenny wrote. "McCreevy commented that the test of any government was how well it explained to dislocated workers that the reforms responsible for their plight were good for the country."

The strategy that turned into Fianna Fáil's programme for national recovery in 1987 used ideas that were "apparent to any first-year economics graduate student", the former secretary-general at the Department of the Taoiseach, Pádraig Ó hUigín stated, according to the cable Kenny wrote to the state department. Ó hUigín had drafted the strategy to cut the budget deficit through wage constraint, reform of the public sector and tax cuts aimed at spurring investment. Fine Gael didn't act on the proposals, which were later adopted by Fianna Fáil, paving the way for the boom years of the late 1990s and the following decade.

Albert Reynolds, Kenny said, considered that EU structural funds were "entitlements" for Ireland and the country had negotiated well to gain the maximum it could from Europe.

"Reynolds claimed he had obtained over €1bn from Brussels as a result of a discussion with [former German] chancellor Helmut Kohl in which Reynolds agreed to support Germany's push for rapid EU enlargement."

Kenny noted that McCreevy said plans by Nicolas Sarkozy, then a minister in the French government, to reduce EU support for new member states that applied low corporate tax rates was "shortsighted".

"McCreevy said that any EU measures to increase growth in the new member states would rebound to the benefit of the entire EU."

Ulster Bank's Cormac McCarthy said the success of the economy came about despite a lack of monetary policy tools – the ability to set our own interest rates and currency control.

"One might think a country that had performed so well in terms of exports and investment would have relied heavily on interest rate and exchange rate levers," said McCarthy. As a eurozone member, in fact, Ireland had ceded control of its monetary policy to the ECB. The positive result, said McCarthy, was "low interest rates".

McCarthy, the ambassador wrote, "believed that if Ireland had retained control of monetary policy, the government would have been tempted to raise interest rates to slow rapid growth in the late 1990s. Instead, the low rates set by the ECB had been a boon to Ireland."