Why austerity-struck Ireland is back in favour

As Greece, Spain and Portugal continue to slide, the Celtic Tiger is rediscovering its roar. Ben Chu reports on how Ireland is heading back to financial independence

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.

Start your day with The Independent, sign up for daily news emails
News
Bill Gates, founder of Microsoft and co-chair of the Bill and Melinda Gates Foundation
businessUber, Snapchat and Facebook founders among those on the 2015 Forbes Billionaire List
News
news... and what your reaction to the creatures above says about you
News
Homer’s equation, in an episode in 1998, comes close to the truth, as revealed 14 years later
science
News
news
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: A Customer Service Advisor is r...

Ashdown Group: Trainee Consultant - Surrey / South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

SThree: HR Benefits Manager

£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

Day In a Page

The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn
Yvette Cooper: We can't lose the election. There's too much on the line

Yvette Cooper: We can't lose the election. There's too much on the line

The shadow Home Secretary on fighting radical Islam, protecting children, and why anyone in Labour who's thinking beyond May must 'sort themselves out'
A bad week for the Greens: Leader Natalie Bennett's 'car crash' radio interview is followed by Brighton council's failure to set a budget due to infighting

It's not easy being Green

After a bad week in which its leader had a public meltdown and its only city council couldn't agree on a budget vote, what next for the alternative party? It's over to Caroline Lucas to find out
Gorillas nearly missed: BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter

Gorillas nearly missed

BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
Downton Abbey effect sees impoverished Italian nobles inspired to open their doors to paying guests for up to €650 a night

The Downton Abbey effect

Impoverished Italian nobles are opening their doors to paying guests, inspired by the TV drama
China's wild panda numbers have increased by 17% since 2003, new census reveals

China's wild panda numbers on the up

New census reveals 17% since 2003