Economy and Trade
Ireland was named the “Celtic Tiger” after its annual GDP growth averaged 6.5% in the period from 1990 to 2007. In the first 12 years of that period, growth was largely attributable to US multinationals establishing manufacturing and service bases in the country. However, following the country’s adoption of the euro in 2002, its growth was mainly fueled by a property boom that the government promoted through subsidies to the sector. Per capita GDP surged, surpassing that of the United States by 2007, and undermined the country’s competitiveness. Following the bursting of the property bubble in early 2008, Ireland became the first EU member to fall into recession in summer 2008. A healthy current account surplus in the mid-1990s had become a massive deficit. In September 2008, the government of Taoiseach (prime minister) Brian Cowen offered to guarantee all bank deposits, recapitalize the banking system, and introduce new public–private venture funds. Agriculture, once the most important sector, is now dwarfed by industry and services. The export sector, dominated by overseas multinationals, remains a key component of the economy.
Economic Policy over 12 Months
Although the Irish government has expressed regret about the excesses of the housing bubble, which burst in 2008, it has no intention of abandoning the country’s globalized growth model. “The key is to turn the model back to export-led growth,” said finance minister Brian Lenihan in January 2009, “so we have to attend to competitiveness.”
Unlike the United Kingdom, the United States, France, Germany, China, and the rest of the G20, Ireland has spurned countercyclical policies, raising taxes and cutting spending in a series of budgets and mini-budgets. New austerity measures in 2010, including a government hiring freeze and public sector wage cuts, have put it in a stronger position, as it raises €19 billion this year. Since the onset of the recession, the government has stripped about six percentage points out of the budget.
In April 2010, the Fianna Fáil-led government took another step on the road to restoring the financial system to health when the National Asset Management Agency (NAMA), or “bad bank,” started buying property loans from banks at a higher discount than expected. The new bank regulator also set higher capital adequacy rules, which will in practice mean the state taking over the bulk of Irish banking. The authorities hope that by crystallizing the biggest losses of the banks and recapitalizing them, they can resume lending and reduce Ireland’s cost of borrowing.
In April 2010, officials also lowered the estimated cost of the bad bank scheme. The central bank said that NAMA would spend between €40 billion and €50 billion, which would be below the government’s initial €54 billion projection.
Since joining the eurozone on January 1, 2002, Ireland has ceded control of its monetary policy to the European Central Bank (ECB). The ECB was slower than other central banks to loosen monetary policy amid the global financial crisis of 2008 and 2009. In March 2009, the ECB cut its key interest rate from 2.0% to 1.5%, the lowest since it started setting euro rates in January 1999. However, US and Japanese rates were, in effect, already at zero by March 2009. By April 2010, the ECB rate stood at 1%, whereas US and Japanese rates remained at close to zero.
Economic Performance over 12 Months
The Irish Republic was once one of Europe’s most dynamic and fastest-growing economies. Growth in 2005–2007 was built on the uncertain foundation of a massive property boom, which some have described as having been out of control. The housing and construction boom was fueled by successive governments, including that of former Taoiseach Bertie Ahern, through tax breaks for property-related businesses.
After the property market crashed to earth in early 2008, the country fell into recession, and this happened faster than in many other EU member states. The country officially entered recession in September 2008, and the country’s GDP contracted by 2.5% during 2008.
Overall, the Irish economy shrank by a further 7.1% in 2009. Exports suffered because of weaker global demand, and because of a sharp fall in the value of the British pound against the euro—the United Kingdom is a key export market. This has undermined Ireland’s competitiveness. The euro gave the country interest rates that were too low in the boom years, and now the government is incapable of devaluing its currency to restore competitiveness.
Domestic demand was also badly hit by the financial crisis and the property slump. House prices fell faster in Ireland than anywhere else in the world in 2009, dropping by 18%. Meanwhile the jobless rate has increased steadily, reaching 13.2% in February 2010. Ireland’s unemployment rate will peak at about 14% in 2010, the central bank said in its quarterly economic bulletin released in April 2010, but it added that the average rate would remain above 13% in 2011.
However, the economy may have grown in the first quarter of 2010, and could be on track for 1% growth in 2010, according to Bank of Ireland. Irish exports are expected to drive recovery in the economy, it said, with a rise expected in 2010 and a return to growth in Ireland’s main markets. However, capital spending is expected to fall again, particularly in construction. The Economic and Social Research Institute has also forecast that the Irish economy will stop contracting and return to growth in the second half of the year.
However, in April 2010 the central bank said that although the economy is likely to start growing on a quarterly basis in 2010, it is expected to decline over the year as a whole. GDP is projected to fall by 0.5% in 2010. The central bank was more optimistic about 2011, predicting that GDP would rise by 2.8%.
Support for Inward Investment and Imports
The principal goal of investment promotion has traditionally been job creation, especially in technology-intensive and high-skill industries. More recently, the government has focused on Ireland’s international competitiveness by encouraging foreign-invested companies to enhance research and development activities, and to deliver higher-value goods and services. IDA Ireland provides a full service to overseas firms considering locating in Ireland. It has been active in the development of infrastructure and business support services, telecoms, education, and regulatory issues, especially in relation to EU policy.
The government would like Ireland to remain an attractive location from a fiscal perspective, within EU rules. The corporation tax rate of 12.5% is among the lowest in Europe, and the country also offers a range of other benefits, including grants to employers who create new jobs without investing in fixed assets.
GDP growth: −7.1% (official, 2009)
GDP per capita: US$42,200 (2009 est.)
CPI: −1.7% (2009 est.)
Key interest rate: 1.0% (April 2010)
Exchange rate versus US dollar: €0.7338 (2009)
Unemployment: 12% (2009 est.)
FDI: US$174.2 billion (December 31, 2009 est.)
Current account deficit/surplus: −US$5.308 billion (2009 est.)
Population: 4,250,163 (July 2010 est.)
Source: CIA World Factbook except where stated