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.

Arts and Entertainment
Characters in the new series are based on real people, say its creators, unlike Arya and Clegane the Dog in ‘Game of Thrones’
tv'The Last Kingdom' embraces politics, religion, warfare, courage, love and loyalty, say creators
Sport
Sergio Romero saves Wesley Sneijder's penalty
world cup 2014But after defeating the Dutch, Lionel Messi and Argentina will walk out at the Maracana on Sunday as underdogs against Germany
Sport
Scoreboard at the end of the semi-final World Cup match between Brazil and Germany at The Mineirao Stadium in Belo Horizonte
Sport
'Saddest man in Brazil' takes defeat with good grace, handing replica trophy to German fans
PROMOTED VIDEO
News
peopleThe Game of Thrones author said speculation about his health and death was 'offensive'
Arts and Entertainment
Martin Freeman and Lauren O'Neil in Jamie Lloyd's Richard III
theatreReview: The monarch's malign magnetism and diabolic effrontery aren’t felt
News
Glamour magazine hosts a yoga class with Yogalosophy author Mandy Ingber on June 10, 2013 in New York City.
newsFather Padraig O'Baoill said the exercise was 'unsavoury' in a weekly parish newsletter
Extras
indybest
News
people'She is unstoppable', says Jean Paul Gaultier at Paris show
Sport
Alexis Sanchez and apparently his barber Carlos Moles in Barcelona today
football
Arts and Entertainment
Miley Cyrus has her magic LSD brain stolen in this crazy video produced with The Flaming Lips
video
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Arts and Entertainment
In his own words: Oscar Wilde in 1882
theatreNew play by the Oscar Wilde's grandson reveals what the Irish wit said at his trials - and what they reveal about the man
News
people
Arts and Entertainment
Unless films such as Guardians of the Galaxy, pictured, can buck the trend, this summer could be the first in 13 years that not a single Hollywood blockbuster takes $300m
filmWith US films earning record-breaking amounts at the Chinese box office, Hollywood is more than happy to take its lead from its new-found Asian audience
News
The garage was up for sale in Canning Place Mews for £500,000
newsGarage for sale for £500,000
Life and Style
tech
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

Associate CXL Consultant

£40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...

Associate CXL Consultant

£40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...

Financial Planning Manager, Qual Accountant, £380

£300 - £380 per day: Orgtel: Financial Planning Manager, Banking , London, £30...

Business Analyst - Financial Services, Trading Systems, Agile

£60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: A leading fina...

Day In a Page

The true Gaza back-story that the Israelis aren’t telling this week

The true Gaza back-story that the Israelis aren’t telling this week

A future Palestine state will have no borders and be an enclave within Israel, surrounded on all sides by Israeli-held territory, says Robert Fisk
A History of the First World War in 100 Moments: The German people demand an end to the fighting

A History of the First World War in 100 Moments

The German people demand an end to the fighting
New play by Oscar Wilde's grandson reveals what the Irish wit said at his trials

New play reveals what Oscar Wilde said at trials

For a century, what Wilde actually said at his trials was a mystery. But the recent discovery of shorthand notes changed that. Now his grandson Merlin Holland has turned them into a play
Can scientists save the world's sea life from

Can scientists save our sea life?

By the end of the century, the only living things left in our oceans could be plankton and jellyfish. Alex Renton meets the scientists who are trying to turn the tide
Richard III, Trafalgar Studios, review: Martin Freeman gives highly intelligent performance

Richard III review

Martin Freeman’s psychotic monarch is big on mockery but wanting in malice
Hollywood targets Asian audiences as US films enjoy record-breaking run at Chinese box office

Hollywood targets Asian audiences

The world's second biggest movie market is fast becoming the Hollywood studios' most crucial
Grindr founder Joel Simkhai: 'I've found love on my dating app - and my mum keeps trying to hook me up!'

Grindr founder Joel Simkhai: 'I've found love on my dating app'

Five years on from its launch and Grindr is the world's most popular dating app for gay men. Its founder Joel Simkhai answers his critics, describes his isolation as a child
Autocorrect has its uses but it can go rogue with embarrassing results - so is it time to ditch it?

Is it time to ditch autocorrect?

Matthew J X Malady persuaded friends to message manually instead, but failed to factor in fat fingers and drunk texting
10 best girls' summer dresses

Frock chick: 10 best girls' summer dresses

Get them ready for the holidays with these cool and pretty options 
Westminster’s dark secret: Adultery, homosexuality, sadomasochism and abuse of children were all seemingly lumped together

Westminster’s dark secret

Adultery, homosexuality, sadomasochism and abuse of children were all seemingly lumped together
A History of the First World War in 100 Moments: Dulce et decorum est - a life cut short for a poet whose work achieved immortality

A History of the First World War in 100 Moments

Dulce et decorum est: a life cut short for a poet whose work achieved immortality
Google tells popular music website to censor album cover art in 'sexually explicit content' ban

Naked censorship?

The strange case of Google, the music website and the nudity take-down requests
Howzat! 8 best cricket bats

Howzat! 8 best cricket bats

As England take on India at Trent Bridge, here is our pick of the high-performing bats to help you up your run-count this summer 
Brazil vs Germany World Cup 2014 comment: David Luiz falls from leader figure to symbol of national humiliation

David Luiz falls from leader figure to symbol of national humiliation

Captain appears to give up as shocking 7-1 World Cup semi-final defeat threatens ramifications in Brazil