Which euro zone country lost more personal wealth as a result of the financial crisis? Ireland – losing more than €18,000 per per person – closely followed by Greece and Spain. The European Central Bank has analysed changes in personal wealth between 2009 and 2013, and found that Germany and the Netherlands gained most from the financial crash.
Ireland was poorly placed to withstand a major financial shock, given the unbalanced nature of most individual wealth holdings, and the failure of many investors to diversify between different asset classes. An over-reliance on property assets, financed by easy credit, was compounded by the poor performance of domestic pension funds. The latter were too heavily invested in equities and, as the financial crisis unfolded, were fully exposed to the global collapse in share prices. In 2008, Irish pension funds lost one third of their value, and delivered the worst performance – among pension funds – in the developed world that year.
The collapse in property prices, unsurprisingly, was another wealth destroyer. House prices fell by some 50 per cent from peak to trough when the property bubble burst, leaving many households in negative equity, and with loans they could not repay. Today, the legacy of debt still remains substantial, with 38,041 owner-occupiers over two years in arrears on their mortgage payments, and an outstanding balance of €8.2 billion. Likewise, over 15,000 by-to-let accounts – over the same period – are €4.6 billion in arrears.
One consolation, however, is Ireland’s rapid rate of economic recovery. GDP growth is rising at a far faster rate than the rest of the European Union, unlike the Greek economy that has continued to contract. Individual wealth creation, and wealth protection, is best secured by adopting a balanced approach to investment, where risk is diversified and spread between different asset classes. One lesson from the Irish financial crisis is that wealth destruction on a great scale can occur whenever that balanced and prudent investment approach is abandoned.