Understanding Ireland:
Table of Contents
Ireland
The "Celtic tiger". role mode for Economic Development in the 1990's. A good example of "state-directed" growth model. Used "economic nationalist" philosophy.
Ireland became a major hub for inward investment in the New Economy. In the early 2000's, Ireland WAS the fastest growing economy in Europe with the youngest population.
Transport: Access to Ireland is through one of three International airports at Dublin, Shannon or Cork. Direct daily scheduled services are available from Ireland to Europe and North America.
The major sectors of activity in Ireland are electronics & engineering, pharmaceutical & healthcare products, computer software and financial services. Since 1980, 40% of all US new inward investment in European electronics has located in Ireland, attracted by the skilled workforce and co-location with many other global leaders. Companies such as 3Com, Amdahl, Apple Computer, Cypress Semiconductor Corporation and Ericsson in the hi-tech sector and Fujisawa and NeXstar in the life sciences field have located operations in the region. In the software sector, Ireland is home to the top 10 independent software companies in the world.
Recommended Reading: "When the Luck of the Irish Ran Out: The World’s Most Resilient Country and its Struggle to Rise Again". By David Lynch. Palgrave Macmillan; 248 pages; $26 and £16.99. Buy from Amazon.com, Amazon.co.uk Book review from The Economist: "EUROPE has seen many spectacular stories in the past 20 years, but few can match Ireland’s rise and fall. A depressed and indebted country in the late 1980s suddenly became the bubbly Celtic Tiger of the 1990s. Then the bubble just as suddenly burst, an experience that could cost Ireland as much as one-fifth of GDP annually in years to come. In 2010 the budget deficit will be at least 32% of GDP and the public debt is almost 100% of GDP. After a brief interlude of net immigration, the Irish are emigrating once again".....
But, despite the crisis..."Real businesses, from pharmaceuticals to computing, continue to flourish. Foreign investment is still being lured in by low corporate-tax rates. The country churns out many good graduates. Public services are patchy but improving, as is infrastructure. Corruption is a problem, but it is surely not as bad as in many other European countries. And, as elsewhere, the church’s baleful influence is now hugely diminished". Also, "Wage cuts are now restoring lost competitiveness."
At the root of the crisis... "disastrous mortgage bank, Anglo Irish. It was the troubles of Anglo Irish that led to the extraordinary decision by Brian Cowen, the Fianna Fail prime minister, taken in the small hours of September 30th 2008, to guarantee all bank deposits in Ireland—and hence to incur a bill that has now reached almost a third of GDP."... read more from Book review from The Economist
Investment Promotion Agency:
Ms Caitriona O'Kennedy
Information manager
Industrial Development Agency
Wilton Park House
Wilton Place, Dublin Ireland
tel: +353 (0) 1 603 4000
fax: +353 (0) 1 603 4040
2011: Crisis update
"In December the former Irish government accepted an EU-IMF bail-out worth 85bn euros (£75bn; $119bn). But the new coalition government of Enda Kenny, which routed Fianna Fail in a February election, wants to get the interest rate on the loan reduced. Short-term loans from the European Central Bank (ECB) have been propping up Ireland's debt-laden banks. Some 35bn euros of the new bail-out money was earmarked for the banks. On 31 March 2011, the Central Bank of Ireland announced that 24bn euros of the bail-out money would be required to recapitalise four banks, following stress tests carried out as part of the international rescue deal. The tests will affect how Dublin renegotiates the terms of the bail-out. A major sticking point is Ireland's 12.5% corporation tax rate - lower than in many other EU countries. Dublin is determined to keep it, as it is attractive to foreign investors, though some EU neighbours grumble that it is unfair competition. The UK and Sweden are extending bilateral loans to Dublin, on top of the EU-IMF bail-out. The UK portion is about £7bn. The Irish state has already taken big stakes in the country's major banks and pledged to guarantee deposits. Since 2008, the cost of bailing out the stricken banks has been 46bn euros, a huge hole in the government's finances. After the 2011 stress tests, that cost will climb to almost 70bn euros. The Irish budget deficit soared to 32% of gross domestic product (GDP) in 2010. The toughest budget in the nation's history, adopted late last year, included a pledge to trim the deficit by 6bn euros in 2011."
read more from BBC here: http://www.bbc.co.uk/news/10162176
Background:
2010: Ireland, fiscal troubles, the IMF and the EU
Euro membership, Inflation, Interest rates – effect on development, bubbles & bust
In recent weeks, we have seen Ireland thrust to the forefront of European fiscal crisis. Why? What has happened? Here is the 5 minute overview of the problem…
A Brief History:
When Ireland joined the Eurozone, they gave up control over the interest rates. During the early 2000′s, while inflation rates were relatively low across Europe (see chart below), the ECB was able to keep interest rates also relatively low. This should be a good thing, but at the same time, a fast-growing economy like that of Ireland probably needed higher interest rates. Slow growth in Germany meant that low interest rates were needed to spur growth, but booming growth in Ireland meant that higher interest rates were needed to slow it down. The fundamental weakness (one of them) of the Eurozone is that “one-size-fits-all” interest rate policy of the ECB might not be appropriate for economies with different business cycles (one up while the other is down). The trouble for a country like Ireland was that without higher rates, the economy was sure to overheat. Another trouble was that Irish investors (especially Irish BANKS) could borrow money at cheap interest rates in continental Europe and invest at higher (expected) rates of return in Ireland (a “carry trade” or interest rate arbitrage). Investors benefited with a fixed exchange rate, since there was no fear of currency devaluation and so the international borrowing seemed “risk free”. Since money seemed easy, it flowed… and created asset bubbles (especially in real estate). All was good…. but, then came the housing bubble burst of 2007 and the fiscal deficit crisis of 2010….
Irish Fears: Why Ireland doesn’t want a bailout from the EU / IMF:
The biggest fear that Ireland has is that by accepting a bailout from the EU / IMF, they would need to raise taxes. The Irish are especially sensitive to threats that Ireland may need to raise corporate tax rates as a condition for accepting EU money. This is sensitive stuff. Ireland previously rejected the Lisbon Treaty because of fears that the EU would force them to raise corporate taxes (goal of the EU to harmonize tax rates across the union). Back then, Ireland won a concession from the other members of the EU to specifically get an exemption, thus “guaranteeing” Ireland’s independent tax policy. The agreement says that nothing in Lisbon treaty would result in “any change of any kind, for any member state, to the extent or operation of the competence of the EU in relation to taxation”. Pretty clear stuff. But the loophole is that if Ireland were to go begging to the EU for funds, they may be asked to “voluntarily” make adjustments to the tax structure in order to receive more funds. This prospect has the Irish press nervous.
The Irish development model (Celtic Tiger): i.e. What Ireland doesn’t want to give up!
The cornerstone of Irish industrial policy has been = low corporate tax rates. This is one of the fundamental reasons that many international companies have used Ireland as a headquarters for their European operations. This started with US technology firms who looked to Ireland in the late 1980′s – early 1990′s. Example: Intel semiconductors arrived in 1989, with other multinationals following soon thereafter.
Ireland was attractive because:
- English speaking workforce
- Well educated
- Young population (compared to European competitors)
- Free trade zone with Europe – as barriers came down in 1992
- Grants from the state
- Low corporate income tax of 12.5% (very low compared to the rest of the EU or the US — “Excluding exemptions, the average corporate tax rate in the EU is 23%; the U.S.’s corporate rate is 35%.1 )
The Irish fear now is that by accepting EU (or IMF) money, they will be “forced” to raise taxes (and not just focus on cutting costs). Outsiders argue that something must be done to raise revenues for the budget to balance. Irish counter that growth is needed and to raise corporate tax rates would be the equivalent of shooting themselves in the foot. Irish argue that FDI, growth, jobs, exports… all of these factors are needed to grow out of this mess, and that low-corporate tax rates MUST remain in order for that to happen. Only time will tell how this will play out…
Related articles
2010 Fiscal Troubles - more details:
Who would lose if Ireland defaulted (2010):
Banking Sector
see page European Banking Industry
see article from TheEconomist.com
Allied Irish Bank — once the biggest in the country — would come under government control as a result of a state-guaranteed share offering worth €5 billion, or about $6.8 billion....The government guaranteed all banking liabilities, including the senior and junior debt of the banks, a decision that has fed a slow burn of anger in Ireland among the many who feel that bondholders, as well as Irish taxpayers, should pay the bill for the bank’s excesses. read more from the NY Times.com here
Risks of borrowing abroad:
"As several of the banks have been part-nationalised, most of their massive debt is now actually government debt.And the great majority of this debt is owed to foreign lenders, which the Irish banks, and therefore the Irish government, simply cannot afford to default on. This is because the Irish Republic, as a small country, is greatly reliant upon this overseas investment. And to default on their overseas loans would make it very difficult - and far more expensive - for Irish banks to borrow from their foreign counterparts in the future. More importantly, if Irish banks could not pay back their overseas debt, it would have a knock-on impact on the Republic's overall credit rating. This would make it more expensive for Dublin to sell government bonds, as it would have to offer a higher rate of interest to more sceptical institutional investors." read more from BBC.com here
"Bad Bank" + National Accounts:
"The National Asset Management Agency (NAMA), the country’s “bad bank”, has been kept off the public balance-sheet. It is taking the worst-performing property loans from Ireland’s banks (at about half their €81 billion face value) in exchange for government-backed NAMA bonds. These loans cannot be easily sold and if they lose further value, as seems likely, the state is on the hook. For these reasons, Standard & Poor’s (S&P), a ratings agency, includes NAMA’s costs in its estimate of Ireland’s public debt. That pushes the burden up by 26% of GDP this year (or 21% of our projected nominal GDP in 2015)."Read more from the Economist.com here
Why NOT to default?:
"“We have to get bondholders from overseas to fund the Irish state and to fund the substantial deficit,” he said. “You can’t go to your bank manager and say, ‘I want to default,’ and at the same time, ‘I want more loans.’ If that’s the underlying message coming out of Ireland, we’re not going to flourish as a country.” read more from the NY Times.com here
Bailouts -
The cost of bailing out Ireland’s banks is now likely to approach 30 percent of the country’s economic output — by far the biggest banking bill, outside of Iceland, that a major economy has had to pay as a result of the financial crisis.
Impact on Budget deficits:
"In a statement, Mr. Lenihan conceded that the bank bailout would have an immediate and dire effect on Ireland’s budget deficit, pushing it up to an extraordinary 32 percent of G.D.P. Taking out the bank costs, Ireland’s deficit is expected to be around 11 percent, despite two years of an austerity drive." read more from the NY Times.com here
"Ireland’s government announced another capital injection in Anglo Irish Bank, a failed property lender, and said it would probably take majority control of Allied Irish Banks. The country’s finance ministry estimated that the eventual cost of bailing out the banks and building societies will rise to as much as €50 billion ($68 billion). This will cause the deficit to explode to around 32% of the country’s GDP. Irish ten-year bond yields have climbed above 6.5%". See article from the Economist.com
Austerity 2010:
"The Irish government has presented three austerity packages in just over a year. In December 2009, the budget for 2010 slashed government spending by 4bn euros, cut all public servants' pay by at least 5% and reduced social welfare. The measures include cuts of 760m euros in social welfare and 960m euros in investment projects. Child benefit is being cut by 16 euros a month, bringing the lower rate to 150 euros a month and the higher rate to 187 euros a month. A carbon tax has been brought in, set at 15 euros per tonne of CO2. The Irish government has had to give staggering amounts of support to its struggling banking sector - the equivalent of 30% of the value of its economy. Including that financial aid, the Irish deficit will be 32% this year - 12% without. The government aims to cut it in stages, to reach 2.9% by 2014. Bad news came in September when figures showed the economy had shrunk in the second quarter from the previous three months. Gross domestic product (GDP) fell 1.2% and gross national product (GNP), seen by some as a more accurate barometer of the economy, fell by 0.3%." read more here: BBC.com
Austerity:
Question - can Ireland cut costs by increasing productivity? Probably a little, but not by much because..."Ireland already has high productivity levels so cannot look forward to further catch-up."
Bond markets (and options)
"Ireland is also a small country in a big currency block: if investors want to buy euro-denominated bonds with a surer return, they have other places to go." Read more from the Economist.com here
EU Membership & Development:
US technology firms looked to Ireland in the late 1980's - early 1990's. Example: Intel semiconductors arrived in 1989, with other multinationals following soon thereafter.
Ireland was attractive because:
- English speaking workforce
- Well educated
- Young population (compared to European competitors)
- Free trade zone with Europe - as barriers came down in 1992
- Grants from the state
- low corporate income tax (very low compared to the rest of the EU or the US -- "Excluding exemptions, the average corporate tax rate in the EU is 23%; the U.S.'s corporate rate is 35%. )
Economic History:
Broke, boom, bubble, bust
Excellent article here from the Economist.com http://www.economist.com/node/17522578
Ireland has been in trouble before. In the late 1980s the economy was sickly. Public debt was close to 120% of GDP. High tax rates choked growth yet did not produce enough revenue to finance a generous welfare state. High inflation and interest rates deterred investment. The young and educated went abroad. Ireland seemed doomed to be western Europe’s straggler: “The poorest of the rich” was the title of a 1988 survey by The Economist.
Yet from this adversity sprang the Celtic tiger, Europe’s unlikely answer to the fast-growing economies of Asia. ... Read more from The Economist here
Places in Ireland
Waterford
County Waterford is located on the South East coast of Ireland. Dungarvan is the administrative headquarters for the County.
The health care sector is a major one in the region with a zoned Industrial Park in Dungarvan specifically for companies from the health care industry. The local work force is well trained in the needs of modern pharmaceutical firms. Investors that have decided upon the location include SmithKline Beecham, Stafford Miller, a division of Block Drugs, Microchem Laboratories, Pinewood Laboratories and Microbrush, a high end dental brush maker.
The plant fronts onto N25, the National Highway of South Ireland. This highway runs from Rosslare Harbour, the main ferry point for trucks and cars to England and France and goes on to Cork, the second largest city in the Republic and home to a ferry port and international airport. Because of its central location, all these points are within an hour and 20 minutes of Dungarvan.
Galway
The county of Galway on the Atlantic coast in the west of Ireland is attracting many new investors - particularly from the US. With a population of 140,000, Galway is one of the main towns outside of Dublin.
Dublin
Dublin is one of Europe's oldest capital cities and the seat of Irish Government. With a population of just over a million (30% of the total Ireland population), the city provides an entry-point to Europe with excellent international transport links. Dublin is a very youthful city with over 43 per cent of persons under 25 years of age.
The city’s economy has enjoyed a boom over the past few years. The city is vibrant and an excellent location for young and fast-moving technology companies.
The major sector in the region is the services sector, employing around 75% of the region’s working population.
Cork
The county of Cork lies along the southern tip of Ireland and is home to 420,000 people. The area's principal new economy resource is University College Cork (UCC) with its 12,000 students and 1,700 staff.
UCC houses many national research facilities including Biosciences Research Institute, the National Food Biotechnology Centre and the National Microelectronics Research Centre.
Recent investments by Red Hat software and broadband company GTS have added to the area's reputation for the highest quality of both work and play.
Shannon
Shannon is located on the Western coast of Ireland with an airport offering connections to other continental destinations.
Shannon is particularly promoting itself as a location for technology companies, from the aerospace to software sectors. A national technological park houses more than 90 organizations with a balanced mix of multinational subsidiaries, Irish technology companies, R&D entities and support services. Shannon Free Zone is Ireland's largest cluster of North American investments, and is home to over 7,500 people employed across a range of manufacturing and international service activities. There is a particular focus on engineering, electronics, telecommunications, aerospace and software in the manufacturing field. And in the services area, financial services, customer support and direct marketing.
Overseas companies located in Shannon include Cabletron Systems, Dell Computers, PKS Systems Integration, QAD, Vistakon, Johnson & Johnson vision products, Analog Devices and Howmedica.
The University of Limerick has an international reputation for its practical, industry inspired focus and devotes considerable resources to aerospace and information systems technology studies. All of the University's undergraduates are co-opted for a period of nine months practical work experience in industry.
Music in Ireland
"Rollicking bands such as the Dubliners and the Fureys have popularised the style, while the Wolfe Tones have taken it even further, being described as 'the rabble end of the rebel song tradition'. Of the contemporary singer-songwriters, Christy Moore is the most prominent playing in a broadly traditional idiom." Read more about Irish music, and festivals from Lonely Planet here -- source: http://www.lonelyplanet.com/best-of-ireland/feature_irishmusic.cfm
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