the troika. what involvement with the external partners has provided are the invaluable funds needed both to keep the government and the banks financed and to implement the programme of fiscal, banking and structural adjustment over a reasonable time frame, as well as welcome external discipline and oversight. 2. some background to begin, it is useful to go back in time and recall a little of ireland ’ s recent economic history in order to understand how the country found itself in the difficult situation it has faced in recent years and to provide a context for explaining the approach taken to managing the crisis. for much of the 1970s and 1980s, the irish economy was a problem economy, characterised by low growth, high inflation and high and rising public debt. in addition, relative to the eu average, living standards were low. this period came to an end in the late 1980s, when the economy, first, stabilised and then was transformed through the second - half of the 1990s on the back of very rapid output, employment and productivity growth. as can be seen from the bis central bankers ’ speeches chart ( chart 1 ), the main engine of growth during this period was the strength of export growth, which was underpinned by wage restraint. consequently, after an extended period of underperformance, the 1990s witnessed rapid economic convergence with europe while maintaining macroeconomic stability. as a result, the unemployment rate fell from almost 17 per cent in 1987 to just over 4 per cent by the turn of the millennium, the fiscal balance moved from a deficit of over 8 per cent of gdp to a surplus of 2. 7 per cent and the debt - to gdp ratio from in excess of 110 per cent to under 40 per cent over the same period. this period, up to 2000, was the true “ celtic tiger ” era, characterised by buoyant export - led growth, strong employment growth, moderate wage and price inflation and healthy public finances. there was no single factor which accounted for the buoyancy and stability of the economy during this period. rather, the period saw the coming together of a number of factors, both long and short - term, which helped to generate strong and stable growth. these factors included : broad macro policy stability, which was built on the back of successful fiscal consolidation in the late 1980s ; a strong focus on improving the economy ’ s external competitiveness through wage restraint ; strong growth in labour supply and a dividend from earlier investment in education ; a marked increase in inward foreign direct

– 09, it is the largest contraction within the oecd area. chart 7 shows that the fall in average annual gdp between 2007 and 2010 was just over 10 per cent. with the price level falling, the fall in nominal gdp, at close to 18 per cent, has been much greater. not surprisingly, given the nature of the preceding boom, the contraction in activity has been greatest on the domestic side of the economy, particularly on the investment side, reflecting the collapse of construction activity. on an annual average basis, total building and construction output fell by more than two - thirds between 2007 and 2010 and it is the fall in this component which has subtracted the most from growth in recent years. consumption has also been hard hit. however, exports have performed better than expected, with the composition of irish exports proving to be somewhat acyclical during the global trade downturn of 2008 – 09. with the domestic side of the economy being relatively more labour intensive, the downturn has resulted in a sharp rise in the unemployment rate, which has risen from over 4 per cent to stand at over 14 per cent at present. ireland ’ s unemployment rate is now one of the highest in the oecd and over half of the jobless have been unemployed for over twelve months. construction has accounted for close to half of the jobs lost. large losses have also occurred in manufacturing and labour intensive services such as retail, hotels and restaurants. younger workers without tertiary qualifications have been hardest hit. mitigating the rise in the unemployment rate somewhat has been a sharp fall in the rate of labour force participation and also a rise in net outward migration. bis central bankers ’ speeches 4. 1 fiscal and banking developments turning to fiscal developments, the crisis triggered a dramatic shift in the state of the public finances. having appeared a model of fiscal probity, running a budget surplus every year, except for one, between 1997 and 2007, ireland rapidly moved into sizeable fiscal deficit from 2008 onwards. while i will deal later with the fiscal implications of the banking crisis, i would emphasise that a large part of the movement into deficit reflected the fact that the crisis revealed a weakness in the public finances which was not apparent during the boom years – the increased reliance on cyclical revenues derived from property related sources. while a movement into deficit could have been expected given the scale of the collapse in economic activity, the deterioration in the fiscal position in 2008 – 09 was driven, in large part, by a sharp