How fabulous Irish growth is saving the euro zone from recession

In the past few weeks, all of Europe has been able to breathe a sigh of relief. Concerns about a deep recession as a result of the Russian war of aggression in Ukraine and the associated energy crisis have eased significantly. On average, the EU Commission expects growth of 3.5 percent in the region for 2022 and 0.8 percent this year.

And then there is Ireland. Once praised as the Celtic tiger, the economy of the island in the west of the EU is currently doing well despite all the geopolitical, pandemic and economic resistance.

In an initial estimate, the country's Central Statistics Office (CSO) put growth at 12.2 percent for the past year. According to data from Eurostat, it is thanks to this significant plus that the euro zone was able to report overall growth.

That success has sparked debate about the sustainability of Ireland's situation and whether the strong upturn is largely due to the accounting policies of US tech companies that take advantage of the island's low tax rates.

Meanwhile, central bank governor Gabriel Makhlouf felt compelled to defend growth as real. "Too many people jump to the conclusion that this is just intellectual property rights being somehow pushed around and that it's not real, but that's wrong," Makhlouf told the Financial Times.

Rather, the growth comes “from real factories with real people”. Among other things, he referred to the important role of the pharmaceutical industry in the country, as well as to multinational corporations such as Intel, which have been producing in Ireland for decades.

In the past, the growth of the Irish economy has shown clear swings. The most notable leap came in 2015, when Apple moved the technology giant's intellectual property rights to its Irish subsidiary, contributing to growth of 25 percent.

The skepticism about the share of US tech companies without a strong local manufacturing base in the growth is also pronounced in their own country. The publications of the CSO should be supplemented by a health warning, the Irish Times etched on the occasion of the most recent publication. "As a guide to how well the economy is doing, (the data) is useless."

It is well known that part of the success of Ireland's economy is due to multinational accounting, which drives growth, agreed Bert Colijn, economist at ING. The measures would cause volatility, the effect had recently worsened.

But Colijn also makes it clear: “That's not the only reason for Ireland's strong performance. The Irish economy is incredibly well positioned to deal with the aftermath of the Covid-19 pandemic and energy shock.”

In the past, growth engines have been the pharmaceutical industry and information and communication technology, which did well during the pandemic and suffered little from the consequences of the energy crisis.

The Republic of Ireland is considered the global center for medical technology and pharmacy. 24 of the 25 largest suppliers are represented here, including Pfizer, Johnson

The services have been in great demand again since the end of the corona-related travel restrictions. However, sectors with high energy requirements, which were under particular pressure last year, do not play an important role on the island.

Despite the sluggish economic output in large parts of the world, Irish exports are also doing well. Goods worth 208 billion euros were exported last year, an increase of 25 percent over the previous year.

Here, too, pharmaceutical companies with exports of 134 billion euros play a central role. Despite all Brexit worries, foreign trade with Great Britain continued to go well. Exports to the neighboring island were 19 percent higher than in the previous year at 17 billion euros, while exports to Northern Ireland, which belongs to the United Kingdom, increased by almost a third.

So far, the labor market has also been very stable, judged ING economist Colijn. Since 2015, unemployment has halved to just over four percent. The large waves of layoffs by US tech companies have not yet had an impact in the country.

But Makhlouf warned that those cuts could be yet to come. Rising interest rates and continued weak growth worldwide would also cloud the outlook.

Nevertheless, the prospects for the island in 2023 remain significantly better than for the rest of the EU. The European Commission expects a 4.9 percent increase. With Malta (3.1 percent) and Romania (2.5 percent), only two other EU countries make it over the two percent line.

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