Economic signs remain strong for the emerald isle, though not necessarily to other eurozone countries.
Cast your mind on other days
That we in coming days may be
Still the indomitable Irishry
WB Yeats “Under Ben Bulben” (1939)
Yeats' allusion to an improved future secured on the back of enterprise and resolve could easily serve as an explanation for the current resurgence of the Irish economy. But is the ‘indomitable' celtic economy showing signs of overheating?
For certain, the Council of EU Finance Ministers (ECOFIN) is concerned. An examination of the updated Stability Program for countries in the eurozone resulted in ECOFIN issuing a formal reprimand to Ireland on 12 February this year. In an unprecedented move, the EU finance ministers informed the Irish government it is required to bring its 2001 budget into line with the EU's broad economic guidelines. Such criticism of Ireland's high-growth economy has inflamed passions both inside and outside the country.
Charles McCreevy, the Irish finance minister, attacked the rebuke as “unwarranted, disproportionate and lacking in even-handedness”. The response from many economists has been similarly defensive. Many feel Ireland, as one of the less politically powerful member states, is being used as a guinea pig by the EU in its peer review process. To understand the depth of resentment this reprimand has provoked, it's necessary to understand the unprecedented economic progress Ireland has made in recent years.
The Irish economy has been growing the fastest, its public debts are falling and it commands the largest fiscal surplus (as a share of GDP) in Europe. The country has a fiscal surplus of 4.6% and an economic growth rate of almost 10%. Unemployment is around 4%, down from 16% six years ago. According to a recent Financial Times leader, these criteria mean that Ireland “easily meets any rule of fiscal sustainability”.
From the mid-1990s the Irish economy has surged forward, founded on targeted EU funding, substantial inward investment (particularly from the US) and a friendly corporate tax rate. Fourteen years ago, the Irish government founded a financial services base in Dublin's derelict docklands, supported by attractive tax incentives. The resulting International Financial Services Centre (IFSC) enjoyed spectacular growth and Dublin became one of Europe's fastest-growing financial centres.
The International Development Agency of Ireland (IDA), the body charged with nurturing the country's economic development, has played a pivotal role in the country's resurgence and now 9,500 people work in the IFSC. According to Catherine Graham, international insurance representative for financial services at the IDA, this sector is growing at almost 25% in employment terms per annum. Oliver O' Connor in the Financial Times cites that half the invisible earnings in Ireland's balance of payments can be attributed to the financial sector.
As a financial services centre, Dublin has attracted such financial heavyweights as DePfa Bank Europe, commanding assets of E27bn and is the third largest bank in Ireland behind the two local operations, Allied Irish Bank and Bank of Ireland. Many commentators attribute the country's strong banking performance to the degree of consolidation, with just five banks controlling 80% of the market.
Assets in the foreign sector equate to E156bn. This figure is just under half the total bank assets according to the Central Bank of Ireland, the body that regulates the financial services industry with the exception of life assurance. Progress in the life sector is similarly strong. There are almost 30 companies writing foreign risk life assurance business. Sanpaolo Life is the centre's largest assurer, writing E1.6bn of new premiums from Ireland last year.
Ireland's thriving international financial services industry reputedly employs 47,000 people, more if associated professions such as law and accountancy are included in the statistics. The strong performance of this large pool, 3% of Ireland's total workforce, has made the industry one of the most profitable internationally. This has not gone unrecognised by many overseas competitors which have not been slow in hitching a ride on the back of the celtic tiger's strong showing. MBNA, the US credit card company, has decided to invest and Northern Rock, the UK mortgage bank, has entered the savings market with a postal account. In 1999, the Bank of Scotland made a deep impression in the Irish mortgage sector, employing financial intermediaries and call centres to offer substantially lower interest rates. Irish competitors were fast to respond and slashed their rates.
This swiftness of response coupled with an enlightened economic stance has been mirrored in the approach of successive Irish governments. Irrespective of political hue, Irish politicians have sought to create an economic environment conducive to inward investment. In 1988, with the full agreement and support of the European Commission, the Irish corporate tax rate for the international financial services and manufacturing industries was set at 10%. In 1999 an agreement was made to move to a universal corporation tax level of 12.5% for all industries, whether international or domestic, taking effect from 2003. In August 2000, Irish legislators were commended by the International Monetary Fund (IMF) for their “high degree of adherence to international standards and codes”, another example of how the Irish government has taken a proactive role in the stewardship of the country's economy.
Ireland's technology and internet sector is another branch of the economy which has been driving the wider boom. The appealing low corporate tax threshold has attracted all the world's leading software firms to the country. Many of these software firms use their Irish bases to ‘localise' their software products, in short to adapt their products for local markets.
Microsoft is a prime example. The Seattle giant has founded an Irish operation which employs 1,000 workers, generates a turnover of $5bn and is its largest overseas operation discounting Japan. Another ringing endorsement of Ireland's burgeoning IT culture is the decision by the Massachusetts Institute of Technology to base its MediaLabEurope research centre in the country.
Ireland's software workforce numbers 24,000 and this growing sector has fuelled a further need, a demand for quality information on the technology industry. ElectricNews is a real-time news service on the web which aims to tap this demand, and other bright lights on the technology front include Softco.ie, an e-business and procurement technologies business. Such small business ventures are reflective of Ireland's successful entrepreneurial climate.
Yet there are signs that the claws of the celtic tiger are being pulled in the technological field. This year has already witnessed the high-profile collapse of e-business Ebeon with the loss of 170 staff. Further evidence of problems is seen in the scaling down of Fyffes' fruit portal, worldoffruit.com. Dell, the PC manufacturer which employs 5,700 people in Ireland, recently announced that its profits for the fourth quarter of 2000 would be less than anticipated, and cable operator NTL confirmed it would be delaying its plans to roll out digital services to its Irish customers. In turn this will slow the spread of technology that makes the internet more widely available. According to a study on internet connectivity conducted by the Irish Banking Review in June last year, only 8% of the 127,900 businesses surveyed possessed an e-mail address and just 4.3% had their own website.
Such statistics could be construed as bleak, but this is countered by continuing growth in the IT sector. Demand for PCs and technological equipment continues, but not at the rate expected. With regard to internet connectivity, other studies are more positive. The Information Society Commission released a study in September last year, which revealed that 77% of Irish businesses possessed websites.
From an economic wasteland so much has been transformed. In the words of the independent Irish Economic and Social Research Institute, the economy is currently enjoying a “golden age”. But are there difficulties looming, which may stifle this prosperity?
The problems the Irish economy is confronting are those of success. The major weakness is soaring inflation, reaching a high of 7% in December last year. Ireland's inflation is the highest in the EU and has certainly attracted the anxious gaze of its European neighbours. This core concern manifested itself in the formal reprimand contained in the European Commission's February assessment of Ireland's budgetary policy. The December budget to which the commission referred cut personal taxes from 22% to 20% for standard rate and from 44% to 42% for the higher threshold. It also raised public expenditure. Tax reduction and spending on Ireland's infrastructure are viewed by the EU as the twin catalysts of inflation, according to Declan Martin, policy director at Dublin's Chamber of Commerce
Irish finance minister, Charles McCreevy made a spirited defence of this expansionist budget in The Wall Street Journal. Inflation, he confirmed, was a product of outside events. “Last year's increase in the rate of inflation was largely externally generated by factors such as oil prices and the exchange rate of the euro.” The leader in February's The Economist concurs with Mr McCreevy and goes on to the suggest that “...whatever your view, Ireland's inflation harms nobody but the Irish. It will not affect the euro's credibility on world markets, nor have the slightest measurable effect on eurozone inflation as a whole.” This point is the key weakness in the EU's critique of Ireland. To make an exaggerated attack on one of its most successful members smacks of a commission trying desperately to flex its authority at the start of its peer review process.
Nevertheless, there are other aspects of Ireland's ‘indomitable' economy besides inflation which could become problematic if they remain unchecked. Irish education has been an unequivocal success story and is often cited by commentators as one of the principle drivers of the boom.
A young, well-educated English-speaking workforce has been crucial in Ireland's transformation and demographically, youth is definitely on Ireland's side. According to Mr Martin, 41% of Ireland's 3.6m population is 25 and under and 69% younger than 44. In addition, to underline its commitment to maintaining a highly-educated workforce, the government increased its investment in universities and technological colleges from the early 1990s. As a result, the number of computer graduates has increased from 500 in 1996 to 2,400 this year. But despite this targeted investment in education, one in five school leavers fails to complete their studies, wooed by the attractions of the buoyant job market.
The health of the job sector is so rude that the Irish training agency, the FAS, has founded a project entitled Jobs Ireland to attract 200,000 workers to Ireland over the next five years. This has been combined with a relaxation of immigration procedures, which has made the granting of visas easier. The rapid expansion of the economy has created severe job shortages with 25,000 vacancies in the hotel and catering sector and 5,000 in the field of information technology. The financial services industry is also confronting a tightening labour market; banks are experiencing higher staff turnovers and have been compelled to offer increased remuneration packages to retain their employees.
Labour shortages placing further pressure on wages, strong growth in private credit and rising property prices are more pronounced signs, according to the IMF, that the Irish economy is ‘over-heating'. Yet many economists would argue these are symptoms of a booming economy. The future for the celtic tiger economy and its 3.7m population is optimistic. There is cause for confidence even with inflation, long considered Ireland's economic Achilles' heel. Dan McLaughlin, chief economist at ABN Amro Dublin, points to how inflation will decelerate this year provided the euro stabilises. Even the European Commission acknowledges this factor, expecting Irish inflation to average 3.6% this year. Praise indeed.