What’s the fastest growing economy in the European Union? Could it be the UK? Or maybe the star performer is Poland, Bulgaria or one of those other East European upstarts?
Actually, by a long chalk, the fastest-growing EU economy is the Republic of Ireland. Seen as a basket case just a few years ago, Ireland has now achieved not only a stellar recovery but also a deep fiscal retrenchment.
Having expanded 5.2pc in 2014, the Irish economy grew no less than 6.9pc last year, according to official figures just published. The equivalent UK growth rates were 2.9pc and 2.2pc. The Republic’s budget deficit, a jaw-dropping 32pc of GDP in 2011 and 12pc the year after, was just 1.8pc of national income in 2015.
Ireland has endured public spending reductions over four years some three times greater in proportionate terms than the UK’s “austerity measures” are imposing in eight. Having yanked the public finances back into the real world, the Republic’s broader economy has reaped the rewards.
Unemployment, up at 15pc in 2012, could drop below 8pc this year. With a general election campaign kicking off last week, Prime Minister Enda Kenny will be busy claiming credit, in a bid to keep his liberal-conservative Fine Gael party in power.
Following the 2008 collapse of Lehman Brothers, few Western nations nose-dived as steeply as Ireland. After over a decade of “the Celtic Tiger”, the Irish economy contracted 6.4pc in 2009 – and pulled decisively out of recession only in 2013, after “graduating” from the controversial €85bn bail-out administered by the European Union and the International Monetary Fund.
By 2014, having been unable to raise capital on international markets just three years earlier, the Irish government was securing long-term borrowing at rates below those of the UK for the first time since 2007. Yields on 10-year sovereign bonds fell to 2.7pc and have since dropped even more – to around 1pc.
This turnaround partly rests on the understanding that the European Central Bank, if necessary, will launch an emergency asset-buying programme – and, more recently, the ECB’s €60bn-a-month of quantitative easing. But Ireland’s borrowing costs have dropped far more than those of other once- stricken Eurozone countries, reflecting the country’s decisive fiscal adjustment.
The Celtic Tiger was fed partly on inward investment, itself a function of a business-friendly corporate tax regime (some would say too friendly) and Ireland’s well-educated, generally hard-working and often tech-savvy workforce. Between 2001 and 2007, GDP grew 5.4pc annually, while Germany expanded just 1.2pc a year, America by 2.4pc and the UK grew by 2.5pc. A combination of innovation, low tax and hard graft means that Ireland continues to win three times more foreign direct investment per head than the UK, despite the UK itself attracting FDI well above the EU average.
It must be said, though, that Ireland’s boom years – and the subsequent collapse – were also about debt-fuelled consumption, over-borrowing and hubris. And there’s a danger, at least, that those lessons haven’t been learnt. Household debt remains over twice as big as annual GDP. One in 8 mortgages are still in arrears, three quarters of those for 3 months or more. Government debt, despite recent heroic efforts, is still over 100pc of national income.
When household, corporate and state debts are combined, Ireland remains one of the world’s most indebted countries. The Irish banking system – the grotesque expansion then collapse of which was the country’s undoing 8 years ago – is also still fragile. Around 20pc of all domestic loans are non-performing, including corporate debt, and any slowdown would add to that slew of impaired assets, bringing further banking sector woes.
Boasting strong agricultural, pharmaceutical and tech sectors, recent prosperity has also been built on foreign trade. Ireland often runs a current account surplus of 3-4pc of GDP. Yet, in an increasingly febrile world, and as financial turmoil looms, that very openness could prove harmful. Certainly, the high-proportion of exports which derive from the Irish subsidiaries of multinational companies – over 80pc on some estimates – points not only to a canny ability to draw in investment, but also the size of the hole should that invest disappear.
There is one fear about the Irish economy, though, which I think is over-stated, and that is the fear of what will happen if the UK votes to leave the EU. As someone of Irish origin, who is often in the land of my forefathers talking with well-informed relatives and friends, I’d say Brexit is being discussed more in Ireland than it is in the UK.
There is, among many, a feeling of dread that if the UK votes to leave, then the Irish economy will suffer. Britain is certainly Ireland’s biggest trading partner, accounting for 22pc of combined imports and exports, while America generates 19pc of Irish trade and Germany 7pc. It’s also the case that Ireland’s return to the top of the EU growth table has been driven in part by Anglo-Irish commerce, with the pound’s strength over the past five years making Irish goods cheaper in euros. Yet I would stress that Ireland has nothing to fear from the UK’s Brexit referendum – widely tipped to take place in June.
Trade between the UK and Ireland amounts to a chunky €50bn a year. Such commercial flows, generating one tenth of all Irish jobs, could fall 20pc after Brexit, according to a recent report commissioned by the Irish government. Really? Yes, the UK is the largest overseas market for Ireland’s fast-growing service sector and the second-biggest destination for Irish merchandise exports for one reason and one reason only. But why is that? Not because of the EU, but because these two countries – and I’m truly honored to be a citizen of both – are so proximate both geographically and culturally.
The reality is that Ireland’s fabled diaspora, and the related range of its cultural and commercial contacts, mean that almost two-thirds of its overseas trade is with non-EU countries – not least the US, of course. Massive Irish-American trade is facilitated not by the EU, but by mutual investment, bi-lateral trade deals and other commercial, ethnic, cultural and psychological ties which have absolutely nothing to do with Brussels.
And, were Britain to quit the EU, the same would apply. The UK and Ireland would rapidly forge an over-arching trade agreement, with London leading the charge. Despite the Republic’s consistent overall trade surpluses, and Britain’s equally consistent trade deficits, one of the few nations that regularly sells more to Ireland than it buys from Ireland is the UK. So it stands to reason that the UK will keep the trade gates open across the Irish Sea.
The main danger to the Irish economy isn’t that the UK leaves the EU, but that – with Deutsche Bank looking shaky and bond yields spiking anew among the weaker euro members – the Eurozone itself could be in for a battering.
For months, Brussels has been spreading scare stories across Ireland about the horrendous impact of Brexit. Yet we’ve done business for centuries, though, through peace and conflict, thick and thin. Even the years of deepest hatred couldn’t stop the compelling logic of the back and forth of commerce and people between us.
It is ridiculous to think that Britain and Ireland couldn’t and wouldn’t rapidly agree a mutually beneficial bilateral trade deal if the UK leaves the EU – not least at a time when relations are warmer than they’ve been for hundreds of years. The UK and the Republic do not need permission from a bunch of eurocrats to do business.