Why Ireland's recovery may not be sustainable

A quick glance at Dublin's docklands area and it's hard to imagine Ireland ever had an economic crisis.

The streets are lined with gleaming office blocks housing the European headquarters for Google Inc., Facebook Inc., Twitter Inc., Yahoo Inc. and several international banks. There's a new five-star hotel, a 2,100-seat theatre and pricey condominiums populated with young professionals from across Europe.

But a couple of blocks away, the picture isn't so rosy. Here in the North Wall neighbourhood, unemployment is 30 per cent and dingy row houses stretch for blocks. "What recovery?" snaps Paul Ryan, who used to work at a glass factory and now helps out at the Sheriff Youth Centre, where the motto is "Always Trying." One of Mr. Ryan's two daughters has gone to Australia and the other is about to follow. "I don't want her to go, but there is nothing for her here," he says.

Such is the current state of Ireland, where most economic indicators have turned positive for the first time since the financial crisis, but many people remain cautious about whether the nascent recovery can be sustained.

By just about any economic measure the country is finally heading in the right direction. Unemployment has dropped to 12.5 per cent from a peak of 15.1 per cent in 2012. Consumer confidence is up, government revenue is climbing and Dublin house prices jumped 13 per cent last year.

All of which helped Ireland last month become the first of the euro zone's five crisis nations to emerge from a bailout program that totalled €67.5-billion, or $100.2-billion. Freed from the demands of the bailout's "troika" – the International Monetary Fund, European Central Bank and European Union – Ireland has regained control over its finances.

"There are signs of recovery, absolutely," says David Duffy, an economist with the Economic and Social Research Institute, a Dublin-based think tank.

"But there are still issues that need to be dealt with," Mr. Duffy says. Among them are a public debt measuring 120 per cent of gross domestic product, nearly five times larger than in 2007, and a housing sector where almost half of all mortgage holders are in negative equity, meaning their houses are worth less than what they owe.

Ireland has certainly seen much of this before. The country has a history of booms and busts with waves of people leaving for better prospects abroad, only to return when things get better.

For much of the past 100 years, Ireland was a backwater reliant mainly on agriculture. That changed in the 1990s with the rise of the Internet and high-value products such as computer chips, pharmaceuticals and medical devices; things that could be made almost anywhere. Suddenly Ireland's low tax rates, light regulation and EU membership became attractive to multinationals.

By 2000, the Celtic Tiger was roaring and unemployment had plunged to 4 per cent from 17 per cent in 1990. The tech bubble's burst in 2000 slowed down the economy, but not construction. Fuelled by low interest rates and a flood of immigration, particularly from new EU member countries in Eastern Europe, house prices jumped 9 per cent annually, after inflation.

When the financial crisis hit in 2008, Ireland got pummelled. The economy shrank by about 10 per cent over the next two years, house prices fell by more than half and the banking system nearly collapsed. Ireland turned to the EU for a bailout in late 2010, using most of the loans to shore up its six ailing banks; three of which ultimately closed while the others came under government ownership. At the behest of the troika, the government slashed spending and introduced a range of new taxes, including Ireland's first property tax.

Life for many became brutal and the exodus soon began. Between 2009 and 2012, more than 300,000 people left, heading mainly to Canada, Britain and Australia. Immigration has made up some of the shortfall, but over all Ireland has seen a net outflow of people since the crisis. "I sold my car and got on the boat," says Jenny Conlon, 27, who left Dublin for London three years ago after earning a master's degree in journalism and finding no work. "At the moment there is nothing for me to go back to," says Ms. Conlon, who works at a consulting firm.

For some, including Vanessa Mulhall, the optimism is taking hold. The 19-year-old college student has started a business making decorative plant pots that she hopes to turn into a full-time profession. "I think the economy is trying to turn itself around," she says. "I'm going to stick it out. I don't like the talk of leaving a country that I've grown up in … I'm a very optimistic person."