Ireland hardly comes to mind when discussing economic powerhouses. The country has long had a reputation as one of Western Europe’s poorest nations, with a third of the population living below the poverty line as recently as the 1980s.
The Emerald Island’s modest population of 4.5 million people and its relatively middle-of-the-road gross domestic product of US$238 billion (No. 43 in the world, placing it between Venezuela and Finland) are also reasons why the country usually flies under the radar for many people.
But the country’s recent eye-popping economic growth is making it a lot harder to ignore. The Irish economy grew 7.8 per cent in 2015, placing it well ahead of even emerging giants such as China and India. More telling is that Ireland is pulling off a quiet economic miracle as most of the rest of Europe’s economies struggle with poor credit growth, high unemployment and weak inflation.
It is a surprising turn of events for a country that only a few years ago was so financially distressed that investors were demanding the Irish government pay them a 14-per-cent return on the 10-year bond. That kind of sky-high yield lumped the Emerald Isle with Portugal, Italy, Greece and Spain to form the so-called PIIGS – a collection of countries that had painfully low economic growth, high unemployment and ballooning debt-to-GDP ratios that put them at risk of default
Today, the other four PIIGS continue to struggle, but Ireland is surging. The government deficit has fallen to 1.5 per cent of GDP in the most recent fiscal year from a height of 32 per cent, and unemployment is down to 8.1 per cent from 15 per cent. Spain, by comparison, has an unemployment rate of 21 per cent and a government deficit at 5.1 per cent of GDP.
It is no wonder economists are quick to sing Ireland’s praises.
“Ireland’s remarkable turnaround since exiting the bailout in December 2013 has seen further rating upgrades lift it higher up the investment grades as strong underlying GDP growth and a tight fiscal position have meant the public debt metrics have fallen significantly,” said Jan Randolph, director of sovereign risk at IHS Global Insight.
The turnaround is built on a number of factors. Some will point out that Ireland readily adopted and stuck to a harsh austerity plan from 2008 onwards that introduced measures ranging from higher taxes to reduced social spending. All told, the painful measures totalled more than 30 billion euros.
But Ireland has also hugely benefited from the large number of foreign companies that have chosen it as a location for European expansion – mainly due to an incredibly low corporate tax rate of 12.5 per cent. The export-dominated economy has also been lifted by a low euro and a strong resumption of domestic demand from its once heavily indebted consumers.
“When you look at a country that was visited with the kind of challenges that we were visited with, it’s almost hard to believe that we recovered from it the way that we have,” said Emmanuel Dowdall, executive vice-president and director North America for Dublin-based IDA Ireland, a government agency responsible for foreign direct investment to Ireland.
“That speaks to the effectiveness of the plans that were put into place and delivered upon in the years after the crash.”
Getty Images A protester shows a placard with the wording ‘This tale has no Happy Ever After’ in Dublin, in Ireland during the depths of the crisis in 2010.
The crash he refers to was in 2008 when the country experienced one of the worst property crashes in the world.
Prior to 2008, prices in cities such as Dublin had been rising since the late 1990s. Then, just as now, Ireland’s economy was one of the hottest in Europe, earning it the label of Celtic Tiger. GDP growth from 1991 to 2001 averaged seven per cent, lifting Ireland from one of the poorer countries in the European Union to one of the richest by 2006.
The runaway growth caused housing prices to double from 2000 to 2006. Prices continued to soar afterwards as tax incentives and poor lending regulations allowed a massive property bubble to form.
The resulting collapse hammered the Irish economy. GDP shrank to a bottom of US$220 billion in 2010, a 22-per-cent contraction from US$274 billion in 2008. The country’s GDP has yet to recover to its pre-crash levels despite its recent gains.
One area of the Irish economy that didn’t contract and which still plays a large role is foreign direct investment. Jessica Benson, vice-president of new forms of investment at IDA Ireland, notes that foreign companies continued to flock to the country even during the crash and foreign direct investment levels did not decline either.
“Before 2006, there was speculation in the Irish housing market and that’s what caused the crash, and most of the job losses were in construction,” Benson said. “But today, our growth is based on foreign direct investment and a very diversified portfolio of companies fuelling that growth.”
Recent companies that have opened or expanded operations in Ireland include Facebook Inc. and Airbnb Inc. Other major companies such as Google Inc., Microsoft Corp. and medical device-maker Medtronic all have a massive presence in Ireland as well. Seven of the 10 largest companies in the country are foreign firms.
The large foreign corporate presence, however, has given critics some ammunition.
Ireland often faces accusations that it is a tax-inversion haven, particularly for U.S. corporations wanting to escape the 35-per-cent tax rate in the U.S. by merging with an Irish company and taking over its address.
Democratic presidential candidate Hillary Clinton lashed out at Johnson Controls Inc. in January for the U.S. company’s proposed merger with Tyco International Ltd., headquartered in Cork. Apple Inc. is one of the most famous examples of a U.S. company accused of sheltering revenue in Ireland, with the company paying almost no taxes on its overseas earnings as a result.
IDA Ireland notes that many companies, however, choose the country not for tax-inversion purposes, but because it makes a natural launching point for European operations. In addition to the low tax rate, Ireland has a comparatively high level of workers with post-secondary education, more affordable office space and a large multinational presence.
“Yes, we have a very competitive corporate tax rate, but without having the other factors that go into making a decision on where to choose in order to build your sustainable competitive company, corporate tax rate is irrelevant,” New York-based Dowdall said.
But for all its successes, Ireland’s growth masks some underlying weakness. The decline in the country’s unemployment rate has been fuelled by a large departure of young Irish in the years following the recession (though there are signs this is reversing). And the country has little scope to cool any overheating in its economy since its interest rates are set by the European Central Bank.
There is also an underlying concern that every time Ireland has managed this kind of impressive growth before, it has ended in an economic crash.
Capital Economics notes in a recent report that Ireland is a very open economy dependent on exports and severely vulnerable to global economic slowdowns. If the world’s economy enters recession, it will likely take Ireland with it.
The country also faces risks from a potential exit of the United Kingdom from the European Union, a move expected to hammer EU economies, especially Ireland, which is dependent on the mainland for trade.
Dowdall hopes, however, that his country’s push to diversify the economy and lure foreign direct investment has made it more resilient to external shocks than in the past. Late last year, the Economist dubbed the renewed surge of the economy the Celtic Phoenix.
“The Irish people don’t want to go down that road again,” Dowdall said of the Celtic Tiger years. “Those were difficult years and a lot of lessons were learned.”