Luck of the Irish has run out

Before the global downturn, the country had emerged as a beacon for foreign companies -- particularly those in the United States -- eager to tap rich European consumers. Ireland benefited from being the only English-speaking nation in the euro zone. But it also greased the wheels of growth by offering companies lucrative incentives and corporate tax rates that are among the lowest in the world. From 1995 to 2007, the Irish economy grew at a blistering average pace of 7.5% a year.

That growth was most visible on the Dublin riverfront, where a new breed of developers transformed this city of cozy pubs with a slew of new luxury condos, wine bars and grade-A office space. Fueled by low interest rates on euro loans and a flood of Eastern European immigrants who came to work in the sprouting restaurants and factories of Dublin, Cork and Shannon, house prices in some areas of Ireland jumped as much as 500% in a decade.

"The problem, you see, is that things got out of hand," said developer Mike Wallace. "The money was too cheap and incentives to build too great. The effect was the opposite of European integration. We became more like America and less like Europe. That has got to change."

Today, Wallace has three prime parcels of land that he'd like to build on. Despite a national housing glut, the properties are in highly coveted areas, but most banks are refusing to lend. Banks that are willing to do so are charging interest rates -- once so low as to promote overbuilding -- that are too high to make any building project worthwhile. "We can't seem to get it just right," he said.

Part of the problem is that European monetary policy, which once worked in favor of fast growth in Ireland, is now working against it. Over the last decade, analysts say, European Central Bank interest rates were probably too low for the likes of Ireland, contributing to a massive credit bubble here that has all but collapsed in recent months.

Now that Ireland needs aggressively low interest rates to stimulate the ailing economy, it is not getting them. This summer, when the economy here became one of the first in the industrialized world to fall into recession, the European Central Bank actually raised interest rates, worried more about the rise of inflation across the euro zone. Although the European Central Bank has since cut rates twice, it has kept them higher than the Federal Reserve's benchmark rate and the Bank of England's. That strategy, economists say, makes sense for euro zone countries such as France, which is not in recession, but not for Ireland.

To be sure, few in Ireland are talking about abandoning the euro, credited with preventing the runs seen in recent weeks in such nations as Iceland and Denmark, which have kept their own currencies.

But many here concede that the euro is also working against a quick recovery. The relatively expensive currency has driven up the cost of doing business in Ireland, worsening woes here as Dell Inc. and the other multinationals that planted their flags in Ireland years ago shift jobs to countries with lower labor costs.