March 19, 2021
Happy St Pats to Ireland: Boom, bust, and recovery for Europe’s most resilient
Happy Saint Patrick’s. This week, the Atlantic Council’s GeoEconomics Center dressed in green and took a moment to reflect on the Irish economy, one of the most resilient in the European Union. At just below five million, it’s the bloc’s ninth smallest by population but second in GDP per capita, and the currently fastest growing economy in Western Europe. The Irish have a tradition of wielding their unique position to play big politics in the EU, especially on finance and trade. Paschal Donohoe, Minister for Finance of Ireland currently serves as Eurogroup President. Until a recent scandal caused him to step aside, Phil Hogan was EU Trade Commissioner. Former Vice President of the European Parliament Mairead McGuinness currently serves as European Commissioner for Financial Services, Financial Stability and Capital Markets Union. These are fitting appointments from a country that rebounded from a severe banking crisis in 2010-12 and is now navigating the intricacies of an “all-Island” economy after Brexit, including a potential UK-EU financial services agreement. Almost everything underpinning the Irish recovery is digital, as low corporate taxation and an English-speaking, well-educated workforce drew in Big Tech and services sectors, a thorn in the side of EU partners. In the coming years, Ireland stands to benefit but also take a hit from its straddling position between the UK and Brussels. Below we take you through components of this story.
Trade. Ireland’s leaders are quick to emphasize how the EU single market transformed the country into a modern economy, and EU membership enjoys some of the strongest popular support in the bloc. Post-Brexit, Irish trade will remain tied to the UK, but commentaries may paint a more dire picture than is perhaps warranted. At the end of last year, the UK accounted for 40 percent of Ireland’s turnover with the EU, but Ireland’s rapid expansion of total trade is increasingly due to its ties to the Continent (see above), a figure bound to see increases when post-split data becomes available. Anecdotally, freight shipping flows between Ireland and France have skyrocketed to avoid backup at the UK landbridge and customs delays. Goods moving between Ireland and EU-26 via the English Channel would now count as UK re-exports. Looking at the above chart, the year 2015 might raise eyebrows. The dramatic dip and recovery reflect a sharp drop in global oil prices and the introduction of sanctions on Russia, followed by a large-scale domestic corporate accounting adjustment, as the revenue from firms domiciled in Ireland for tax purposes were assumed into Irish figures– illustrating both volatility and strength for the “Celtic Tiger.”
In Brussels, accounting can mean everything. Ireland’s low corporate tax rates have incentivized over a thousand multinationals to base their European operations in Dublin. The European Commission has sought legal recourse against the Irish loophole, rejected so far by EU courts. EU-wide amendments to tax regimes require unanimity, shielding other member states from forcing changes through qualified majority voting procedures. This is an uneasy ceasefire with the digital taxation debate at a steady boil. Any solution that allocates tech revenue to market jurisdictions (for Ireland that means the rest of the EU) will divert revenue from Ireland’s rebound.
Banking Sector. Dublin’s approach toward financial regulation has made a clear shift since its financial crisis. The IMF, European Commission, and European Central Bank (infamously known as the “Troika”) imposed tough austerity measures to accompany its fiscal aid, ending an era of risky international lending (beginning with adoption of the euro in 2002) and rampant speculation in the constructing and housing sectors. The ominous collapse of beleaguered Anglo-Irish Bank in 2008 foresaw several years of nail-biting economic toil. ECB regulations now govern Ireland’s systemic financial institutions. Meeting Troika demands, bank assets were sold until they balanced deposits and two nationalized banks were wound down and liquidated. The Irish banking system, once internationalized and dependent upon wholesale funding and riskier overseas clients, is decidedly reserved and domestically oriented. Irish banks, as the above graphic shows, are much smaller. The successful implementation of IMF-led budget cutting has now earned Ireland the moniker “Celtic Phoenix,” (vice “Tiger”) but the Republic’s faith in banks to buoy the economy has been replaced by welcoming digital giants, a sector that will see significant regulation in the coming years.
COVID Recovery. After years of suspense over the “Irish backstop” and customs declarations in the North Sea, arrangements still under daily challenge, COVID vaccine rollout presents a new stark reality along Ireland’s internal line. Nearly three times as many residents of Northern Ireland are currently vaccinated, out of a population of less than two million. And while EU countries have closed and reopened Schengen borders throughout the pandemic, the free movement of people (many are dual citizens) within the UK-Irish travel area remains enshrined in the Good Friday Agreement. COVID has shown that Ireland remains caught between two worlds, but its leadership and industry remain clever in how they leverage this unique position, in boom or bust.
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