Contrary to popular forecasts, the European Union managed to avoid a terrifying recession at the end of last year. Despite the energy crisis and the associated record inflation, instead of regressing, the EU in the last quarter even achieved a modest increase. And all this thanks to Ireland – the fastest developing country in the entire Community.
The truth is that for a long time, the Celtic Tiger (the nickname given to Ireland during the economic boom of the 1990s) was a strange creature. Its economic growth did not stop even during the pandemic – while the rest of European economies were sinking, the Irish recorded an increase of 6.2 percent. In 2021, it amounted to 13%, and in 2022 it was estimated at 12%. (against 3.5 percent in the entire euro area).
Ireland as a model for the Community?
At first glance, Ireland may seem like a role model. However, when viewed under a microscope, a much more complex reality emerges, as virtually the entire economic structure of the country is based on a handful of US multinationals benefiting from an attractive 12.5% corporate tax. Considering that a global tax of 15% is to apply from next year. – after the OECD agreement – the Irish economic miracle may collapse like a house of cards. Therefore, when talking about the miracle of the Celtic Tiger, it is worth asking whether it is real or artificial. “It’s both at the same time. I would classify it as half a temporary miracle,” says Eoin Drea, one of the expert analysts at the Wilfried Martens Center for European Studies think tank. “It is real in the sense that investments by US multinationals have created tens of thousands of direct jobs in recent years. These jobs pay well, and this in turn has created more indirect jobs and led to increased tax revenues for the government. However, this is also artificial and temporary as much of the growth that is reflected in Irish economic statistics is not real but simply reflects how these companies are transferring money through Ireland to reduce their global tax bills. A process that is completely legal, but is unlikely to be as effective if the OECD proposals come into force,” adds the expert.
Growth thanks to American concerns
When in 2016 the relocation of Apple’s intellectual property to Ireland was estimated to have contributed half of that year’s miraculous 26% GDP growth, Paul Krugman, Nobel laureate in economics, warned in the New York Times of the what he called “dwarf economy”. Many large US companies, including Google, Apple, Meta, Intel and Pfizer, have European bases in Ireland. More than two decades ago, Ireland opted for a risky digital business. Dublin realized that cutting corporate tax – which initially led to a sharp fall in government revenue – was not enough. A whole range of incentives had to be offered to facilitate the creation of new companies. In short, a small-scale recreation of Silicon Valley. And it worked. Today, 40 tech companies are being created in Ireland every day, generating two out of every three new jobs. About 12 percent employees in Dublin are programmers. Ireland is the second country in the world in terms of technology investments per capita and the third with the highest number of technology companies per capita. Green Island is also a powerful pharmaceutical headquarters and a global aircraft leasing center. However, there is also another, completely different reality. Earlier this year, one in three Irish people said they struggled to make ends meet, according to the annual WIN survey of the cost of living in 36 countries.
Green Island is not a paradise
Compared to other economies in Western Europe, Ireland suffers from huge infrastructural deficits: homelessness, lack of public transport in cities (Dublin has no underground), very slow rail connections, some of the most expensive childcare centers in Europe (all privatized), very poor and expensive healthcare system. It’s a model similar to the US – with relatively low taxes but poor public services in many areas, making it a very expensive place to live. In short, the Irish system is not without flaws. Irish central bank governor Gabriel Makhlouf recently defended himself in an interview with the Financial Times against accusations that this economic model is simply fiction. “Many people think or come to the conclusion that it is about intellectual property that moves in the cloud and is not real. But this approach is wrong. Things, especially in the pharmaceutical industry, are made in Ireland. Real people in real factories make the top 10 drugs in the world. One of the oldest multinationals in Ireland is Intel, which also produces a variety of things,” says Makhlouf. Employment in foreign direct investment in Ireland increased by an average of 8%. in the last five years. The unemployment rate has more than halved in the last seven years, reaching 3.9% in April. However, the Central Bank of Ireland uses alternative growth measures to eliminate the influence of multinational companies and get a better picture of domestic demand. One such tool is gross national income (GNI), which for 2022 showed an increase of 5.9 percent. (instead of 12%).
Economic miracle or speculation?
So an economic miracle or a speculative bubble? “Ireland really isn’t as rich as it seems,” emphasizes Eoin Drea. The analyst says that the current “two-speed” model (with profitable US multinationals and their well-paying jobs on the one hand, and Irish national companies on the other with slower growth) “could last five to seven years in the medium term, and perhaps even longer if there is any delay in implementing OECD reforms. (…) However, if these proposals are fully implemented, tax revenues are likely to fall by at least 15%. per year.” Corporate tax revenues increased by 48% last year. – to a record level of EUR 22.6 billion. The collection of this fee is the second largest source of state tax revenue. In 2022, it accounted for 27 percent. of Ireland’s total tax revenue, while the average across the 38 OECD member countries in 2020 (the most recent year for which data is available) was only 9%. A group of 10 multinational corporations, all tech and pharmaceutical companies headquartered in the United States, account for 60 percent of corporate tax collection. Directly and indirectly, US multinationals employ over 375,000 people in Ireland. people, which is about 15 percent. country’s workforce. Overall, foreign companies account for about 53 percent. all income taxes paid by corporate employers. However, when the corporate tax rate rises to 15 percent. from the current level of 12.5 percent. The Celtic Tiger will lose its appeal compared to other countries. The Irish Ministry of Finance estimated last January that around half of the proceeds from corporation tax are “transitional” and will be lost as the new tax rules are implemented from next year. The equivalent of the entire Irish education budget could be lost.
The Celtic Tiger’s American Dream
In short, the Celtic Tiger is approaching another cliff just over a decade after the European Commission, the European Central Bank and the International Monetary Fund had to save it from imminent bankruptcy after the 2008 crisis left Ireland with one of the highest levels of public debt per capita in the world. However, regardless of the impending financial meltdown – according to Drea, “Dublin is unlikely to wake up from its American dream anytime soon.” “Ireland’s dependence on US multinationals is just another expression of the country’s affinity for the United States – a shared heritage shared by US presidents from John F. Kennedy to Ronald Reagan to Joe Biden.” predate Dublin’s acceptance of European integration and make it unlikely that Ireland will ever have the same intensity of economic, cultural and other links with France, Germany or the rest of the EU. But he warns that Ireland needs to learn to diversify. Joe Biden, who confirmed his Irish roots during his last trip to Dublin last April, asserted that “everything between Ireland and the United States runs deep.” And that is the current economic reality in Ireland. However, Drea warns that as the tax boom wears off, “Ireland must ensure that its American Dream does not turn into a recurring economic and financial nightmare.” Source: elconfidencial