Despite their very different political and economic structures, Ireland and Spain shared a common experience of extreme openness to mobile international capital during the 2000s. Their vulnerability to financialization resulted in a common experience of rapid asset price inflation, which left both countries particularly exposed when the international financial collapse took place.
This paper undertakes a structured, focused case-study comparison of these countries’ experiences. The research design is based on the selection of two most-different cases that nonetheless share a common outcome of interest. The objective is to profile the key underlying political configurations that account for the policy combination underpinning rapid financialization and the consequent concentration of investments in real-estate rather than in productive activity, and to trace the processes that follow from our key causal mechanisms.
The initial conditions at the time of creation of EMU include a common background as late industrializers, each having a relatively weak domestic productive capacity (notwithstanding Ireland’s successful FDI development profile); and a pattern of relationships between the political system and the main domestic banks that accorded considerable political weight to the banking sector, combined with career mobility from politics into finance, and interlocking directorates in the banking system. This had different political origins. In Spain, it followed from the central political influence of the banking sector in the process of democratic stabilization; in Ireland, from government commitment to light-touch regulation analogous to that of Britain, to facilitate the internationally traded finance sector. But it had common consequences, including a persistent problem in both countries of under-funding of state activities, masked by over-reliance of the tax system on the revenues flowing from the construction sector during the 2000s. The key puzzle in both cases is why a pattern of unregulated risk was permitted to develop.
