Rates helped stoke construction boom and bust but may limit downturn DUBLIN (MarketWatch) -- A walk along the bank of the Liffey in the east of Dublin is like a step-by-step guide to the boom-and-bust economy that Ireland hoped it had left behind when it joined the euro zone. From the imposing banking centers to high-end shopping malls where Dubliners could spend their newfound wealth, and the numerous half-completed apartment and office blocks -- it's a picture of growth that just went too far, making the country especially susceptible to the global slowdown that began in the U.S. "We have a saying: When America sneezes, England catches a cold -- and by the time it gets to Ireland it's pneumonia," said taxi driver Dominic Boyne, whose business has been hit hard as consumer spending declines. Going into the euro zone, Ireland had the fastest-growing economy of all the adopters of the new single currency. It had only just emerged from a long and deep recession in the 1980s and was in the process of catching up with its neighbors in Western Europe. But the country's size meant it didn't have much weight when it came to monetary policy for the region. The so-called Celtic Tiger suddenly found itself with an interest rate more suitable to a bigger, slower economy such as Germany's. A decade on, it was the first member of the euro zone to fall into recession, and economists expect the downturn in Ireland to be deeper than for most of the Continent. Average real GDP growth from 1992 to 2004 was 7%, compared with an average growth rate of less than 3% throughout the 1980s. The unemployment rate has been a little over 4% since the start of the decade, having hovered between 15% and 20% in the 1980s. And the main ISEQ index grew ninefold from early 1992 through its peak last year -- well over twice the rate of the S&P 500. But now Ireland is bracing for a sharp downturn. Its gross domestic product in 2008 is expected to contract by 1.6%, according to European Commission estimates. And unemployment, which had risen to 6.7% in November, is poised to hit 8% or more next year. The stock market, meanwhile, has dropped around 75% from its peak and recently hit its lowest level since early 1996. Euro adds to inflation pressure Exactly how much influence the euro had in stoking Irish growth is up for debate -- the construction sector was already on the rise in the 1990s -- though most agree it was a significant factor adding velocity to the expansion. Paul Sweeney, economic adviser to the Irish Congress of Trade Unions, said interest rates during the boom years were as much as four percentage points below where they should have been. Ian Talbot, chief executive of the business lobby group Chambers Ireland, said low rates pushed up house prices, but it's not a certainty that the government would have lowered interest rates even if it had had the power to. "It was undoubtedly government policy for many, many years to keep the property sector as buoyant as possible, because [the government] was a significant beneficiary," Talbot said. A stamp-duty rate of up to 9% on the sale of existing homes was a major contributor to the government's coffers, he explained, though exemptions for first-time buyers have been introduced since prices began to tumble. "For many years we still convinced ourselves that we were playing catch-up, and then one day we realized we had the most expensive property in Europe, if not the world, and the catch-up had gone too far," Talbot said. Optimism prevails While some people may have had concerns about the impact on the economy, the general attitude toward the euro when it was introduced was one of optimism -- and few people seem to have changed their minds. The prevailing view remains that adopting the currency was the right thing to do. Bernard McAllinden, a strategist with NCB Stockbrokers, said one reason for that is that people didn't have an emotional attachment to the previous currency -- the punt -- which had only broken its peg to sterling around 20 years earlier, coinciding with a tough period for the economy. The changeover to euro notes and coins three years after the currency was first introduced also went relatively smoothly, except for the queues of people wanting to swap money at the central bank rather than getting their change from the shops that had been pre-supplied with cash. The biggest challenge was dealing with the expectation that shops would use the changeover to hike prices, said Eimer O'Rourke, head of retail-member services at the Irish Banking Federation, who was involved in the committee that began planning the switch in the mid-'90s. "You will invariably have had some, but there was a very high standard of dual pricing," O'Rourke said.

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