Is the Celtic Tiger stirring? Three years after Ireland's €67.5bn (£56bn) financial rescue by the International Monetary Fund and the European Union there are some signs of improvement in the Emerald Isle.
It is true that unemployment remains at a painful 14 per cent. House prices are down 50 per cent from their peaks in the construction bubble and very likely have further to fall before they bottom out. Dublin's 2013 budget deficit is projected by the IMF to be 7.5 per cent of GDP this year. And the national debt is heading for a crushing 120 per cent of GDP. The Irish banks still aren't lending, even though they were rescued en masse by the Irish taxpayer in 2008 at a staggering cost of 40 per cent of GDP.
But compared to Greece, Spain and Portugal, which are all still contracting, Ireland seems to be doing surprisingly well. It has managed to eke out some GDP growth since the depths of the crisis, despite several rounds of government spending cuts and tax rises. The economy grew by 1 per cent last year, following 1.4 per cent in 2011. And in March the government successfully issued £5bn in 10-year debt, which is now yielding just 3.5 per cent. This implies that Dublin will be able to finance itself independently when its rescue programme comes to an end later this year.
Dublin remains a firm favourite of officials at the IMF, the European Commission and the European Central Bank for willingly taking its austerity medicine since 2009 and – even better – seeming to recover with it. That is one reason why the ECB agreed in February to stretch out the repayments on a major loan to Dublin from the crisis, effectively easing the country's national debt burden.
So how did Ireland manage it? What has it got that the other bailed-out economies of southern Europe lack? The answer is that Ireland has been assisted in recent years by inward investment from multinational companies. These footloose international corporations have been attracted by Ireland's 12.5 per cent corporation tax rate introduced in 2003. Hundreds of multinationals have set up shop in Ireland over the past decade to benefit from the levy, which is much lower than the global average of 24.4 per cent.
Ireland's position in the European Union and the eurozone also helps. The US technology giants Microsoft, Google and Facebook all use the country as a base through which to export throughout Europe. They sell advertising and other services throughout the Continent and book their revenues and profits in Dublin.
It's not just the low headline corporation tax rate that has been the lure. Special income tax breaks for executives recruited from abroad also act as an inducement.
Yet the 12.5 per cent tax rate is something of a red herring since many companies do not even pay that. Despite the influx of multinationals to the Irish Republic the corporation tax take has declined from €5.16bn in 2003 to €3.5bn in 2011. This is because Dublin is very relaxed about companies registering their profits in Ireland and then promptly shifting them out to other tax havens such as the Cayman Islands or Bermuda, sparing them the need to pay even the ultra-low domestic rate.
Google pays an effective rate of just €22.2m on its €9bn European profits that are registered in Ireland. Last year, the US Senate found that Irish subsidiaries helped Microsoft reduce its American tax bill by $2.43bn. Large amounts of multinational profits are effectively washed through the country in this way. Ireland is a European tax haven, helping to suck away profit tax revenues that would otherwise accrue to countries such as the UK which badly need to balance budgets.
One can see the profound economic impact of multinationals in Ireland's official statistics. Normally a country's Gross Domestic Product and its Gross National Product are roughly equal. Not in Ireland though. Irish GDP took off like a rocket in the 2000s. GNP growth, by contrast, was rather less impressive. This is because GNP strips out non-Irish firms' profits. Around a fifth of Irish GDP is actually profit transfers from multinationals.
GNP thus gives a more representative view of the fortunes of the domestic Irish economy. Despite the smaller boom, GNP is still 8.7 per cent below its peak at the end of 2007. The presence of so many multinationals also flatters the performance of Ireland's economy through the official export figures.
The bulk of Ireland's GDP growth in recent years is due to exports, which grew by 3 per cent in 2012, hitting a record of €171bn. Excluding the boost from net trade, the Irish economy would have contracted by 20 per cent since 2010 rather than growing by 2.3 per cent.
Exports matter massively to Ireland. They represent an astonishing 106 per cent of the country's GDP. Compare that with 20 per cent in Spain and 23 per cent in Greece.
The bulk of Ireland's exports are accounted for by non-Irish multinationals. And despite Ireland's substantial pharmaceutical manufacturing industry, most of its recent foreign sales growth has come from services. Its services exports have grown from €73bn in 2007 to €88bn in 2012, a 20 per cent increase. By contrast goods exports have been flat, at around €83bn over the past five years.
Despite pressure from the rest of the eurozone for Dublin to bring its corporation tax rate into line with the rest of the Continent, Dublin is determined to keep hold of it. Politicians of all parties regard the rate as essential to its high inward investment economic model.
Despite the profit-shifting, some of these multinationals revenues' do stick and benefit Ireland. Multinationals employ 150,000 people, some 8.5 per cent of the workforce. Dublin's "International Financial Services Centre" – an agglomeration of banks and hedge funds dating back to 1987 – employs 30,000 people. Those new employees have to live somewhere in the country and they have to spend some of their lightly-taxed salaries in Ireland, so their presence helps boost consumption. But at what cost to other countries?
On paper, Ireland seems to be achieving the economic rebalancing that the UK, among many others, is looking for. Domestic demand is contracting while exports are growing impressively. Ireland's current account deficit, which hit an unsustainable 5 per cent of GDP in 2007, has turned into a surplus. But look a little closer and it becomes clear that the Celtic Tiger is restoring itself, in no small part, by beggaring its neighbours.Reuse content