The current sovereign debt crisis erupting all over Europe has the Emerald Isle locked squarely in its midst. As recently as 2006, Ireland was one of the wealthiest nations in the world, with GDP growing at a robust average 6% rate each year from 1995 to 2006.
A country-wide banking crisis brought about by the world financial crisis and the collapse of the construction and real estate markets in which the country’s economy was heavily invested, has left the Irish economy struggling. Reports had placed those segments at 50% of the total Irish economy before the crisis. Bailout of Irish banks, including Anglo Irish Bank, by the government has added to the already huge deficits the government is currently running.
Ireland is currently experiencing a negative GDP growth rate of -1.6% with an estimated unemployment rate of 13.7% for 2010, according to U.S. Government statistics. Irish debt stands at 94.2% of GDP, up from 65.5% of GDP in 2009. Austerity measures, a large infusion of loans from the European Union and the International Monetary Fund to shore up banking sector capital, and wage concessions by public sector employees are estimated to produce a modest increase in GDP for 2011.
Recently, the Irish government has requested a reduction in the interest rate it pays on loans it has received from other EU members. Those EU members are requesting that Ireland give them a huge concession in return for lower rates – an increase in its corporate tax rate. This rate, 12.5% has encouraged foreign investment in Ireland for the past two decades. Negotiations will resume again during the annual EU meetings March 24 and March 25 this year.
It is this low corporate tax rate that was a cornerstone of the Irish economy’s resurgence in the early 1990s. High unemployment, high tax rates, a growing welfare state and emigration of the country’s young and educated all contributed to a sickly economy at the end of the 1980s which was running deficits at 120% of GDP at the time. A newly elected government at the time enabled inflation and interest rates to fall by cutting government spending, negotiating wage and price concessions, and, importantly, attracting foreign investment by cutting the corporate tax rate to 12.5%. From these measures was borne the “Celtic Tiger”, the term which referred to the Irish economy’s strong growth during the 1990s and early 2000s.
Can Ireland pull off another remarkable recovery? One factor which should not be discounted is that making changes in a country of Ireland’s size is easier. As quoted by the Economist, “the agility of a small economy means you can push changes through quickly”, said Christoph Mueller, the German chief executive of Aer Lingus.