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Painted monetary symbols are seen on a wall in Dublin, Ireland, on October 22, 2014.
Reuters / Cathal McNaughton
Magic recipe.
STAND OUT

This European country is bucking 2018’s downward trend

By Annabelle Timsit

This has been a lackluster year for European Union economies. Amid rising oil prices, uncertainty tied to Brexit, the China-US trade war, and brewing economic crises in Turkey and Italy, the European Commission revised 2019 growth forecasts down (pdf) after very short economic recovery. Meanwhile, domestic protest movements in countries like France, Poland, or Hungary have cast a gloomy shadow.

One country is bucking the trend.

The Republic of Ireland is an unlikely pick for EU economic and political maverick of 2018. A nation of fewer than 5 million inhabitants, it was one of the hardest hit by the 2008 global financial crisis. But the country has managed to grow its economy at rates well above the EU average and this year went through several landmark cultural transformations that brought it closer to its European neighbors. So, how did Ireland do it?

Ireland’s growth

Before the 2008 financial crash, Ireland was one of Europe’s biggest success stories. Nicknamed the “Celtic Tiger,” it had low unemployment and inflation, solid growth, and low public debt. “No other country in the rich world has seen its image change so fast,” The Economist wrote in 2004 (paywall)—a far cry from its description of the country in 1988 as “the poorest of the rich.”

But Ireland relied heavily on a property bubble (pdf) that burst spectacularly after 2008, becoming the first euro-zone country to fall into a recession.

In 2013, the Irish economy started to recover, notably because it set corporate tax levels low to attract large multinational corporations—like Google, Microsoft, or Pfizer—who used Dublin as a base for their European activities. These companies have transformed the Irish economy, accounting for up to 90% of goods and services exports and bringing in foreign investment.

When the European Commission released its latest economic forecast in November, it announced an overall slowdown in growth—but not for Ireland, which is expected to grow by 7.8% this year,  driven by low unemployment and investment in sectors like construction. The Commission also predicted an Irish growth rate of 4.5% for 2019, or more than double the growth rate of 1.9% predicted for the euro zone. Those figures, the Commission writes, are “distorted by the activities of multinational companies” and when stripped of that activity settle at a still-respectable average growth rate of 4% between now and 2020.

Forecasters worry that Brexit will harm Ireland’s economy. Others believe it may be a blessing in disguise, allowing Ireland to broaden its role in EU and transatlantic politics, and attract multinational companies looking to exit London.

Brexit “will force us to forge relations and shape our destiny within the EU without the presence of our nearest and strongest ally since 1973,” Phil Hogan, the European Commissioner for Agriculture and Rural Development (and an Irishman), wrote. Meanwhile, Ireland’s ambassador to the US, Daniel Mulhall, hopes (paywall) Brexit will turn Ireland into “a bridge between the EU and the US both for investment but also for influence.”

Cultural shifts

It’s not just the economy that has perked up in recent years. Ireland has gone through several progressive cultural shifts, many of which relate to the declining role of the Catholic Church, as Yasmeen Serhan explains in The Atlantic:

“Although a 2016 census found that the total number of people identifying as Catholic fell by 132,200 between 2011 and 2016 (a decline that corresponds with the rise in those who identify as having no religion), an overwhelming 78.3% still identifies with the Church. But the extent to which the religion’s beliefs and practices govern Irish society has, over the years, undergone a gradual shift—one that some attribute to the weakening of the Church’s status following revelations of clerical child abuse in the 1990s.”

This evolution has led to several landmark changes, including the legalization of same-sex marriage in 2015; the party election of the country’s first openly gay prime minister, Leo Varadkar, in 2017; a repeal of the country’s blasphemy laws; and a referendum to allow a repeal of the country’s strict anti-abortion laws in May this year. Women who were once forced to fly to another country to access abortion services may be able to access them at home as early as January.

Dan O’Brien, chief economist of the Institute of International and European Affairs, an Irish think tank, attributes these changes to Ireland’s integration into Europe. “A society that becomes more internationalized, more Europeanized, there’s a certain homogenization process that goes on, where you adopt the values of the bigger community,” he says.

It’s also indicative of how young progressives—who voted overwhelmingly in favor of abortion rights (pdf) in 2017 and gay marriage in 2015—are changing their country’s political landscape. According to Ireland’s 2016 census, more than 30% of the population is under 25.

The full picture

Of course, not all the news is good.

Analysts warn that Ireland’s growth is a “double-edged sword.” Journalist Eoin Burke-Kennedy wrote in March that the booming Irish economy is an “illusion,” because the wealth generated from taxing large multinational companies doesn’t trickle down to Irish people. “Outside of the IT and finance sectors,” he writes, “wage growth has been sluggish, household debt remains elevated, and big-ticket items such as housing continue to erode purchasing power.”

There’s also an undersupply of places to live in large cities, especially in Dublin, where a housing crisis has forced hundreds of people into temporary accommodations.

“There are winners and losers to this type of growth regime,” explains Aidan Regan, an assistant professor at the School of Politics and International Relations at University College Dublin. “Irish policy-makers attract multinationals from Silicon Valley—big tech firms in particular—through very lucrative corporate tax policies…a liberal labor market and access to the European single market,” he says. Multinationals “cream off the rents in the form of corporate taxes, and that makes it possible to expand expenditure on all those things that citizens want in a democracy; more healthcare, more education, and so on.”

This has put the government in a tough position, as Burke-Kennedy writes. “If it addresses these capacity constraints too swiftly it will overstimulate the economy,” while “failing to do so may overheat the economy anyway.” And the government depends on the revenue from these companies to provide the public services that make Ireland a good place to live.

In addition to these economic challenges, and despite landmark progressive votes, cultural challenges remain. The Catholic Church, for instance, still dominates the public primary education system in Ireland, and many parents who are not Catholic or not religious “find they have no choice but to send their children to local schools teaching Catholic faith formation,” according (paywall) to The New York Times. The government is trying to change this system; recently, parliamentarians passed a bill to prevent Catholics schools from discriminating against non-Catholic children when those schools receive more applications than they have spots—a practice known as “baptism barrier.” But critics say that the system is still geared towards Catholic pupils.

What’s next for Ireland?

Despite the potential opportunities Brexit might provide, a recent analysis (pdf) conducted by Copenhagen Economics, a Danish consulting firm, at the request of the Irish government found that the Irish economy will grow up to 7% less than it would have without Brexit, mostly because Ireland exports so many goods and services to the UK.

O’Brien says this is the most likely reason behind a steady decline in consumer confidence in recent months: “We probably talk about Brexit more in Ireland than in the UK, and I know people are talking a lot about Brexit in the UK these days,” he says.

O’Brien believes that what makes the Irish economy so strong—access to the common market and a globalized, export-oriented economy—also makes it vulnerable: “When you’re so globalized, any big changes that happen outside can cause you to have a recession.” He identifies three significant risks for Ireland, including Brexit, possible trade tensions between the US and Europe, and the ripple effects of a financial crisis in a eurozone country like Italy.

Regan says he worries about the future of Ireland’s growth model, given the EU’s stated intention to prevent tax evasion and encourage fiscal integration between member states. “Where does Ireland fit in that context, if it has generated a growth model which is basically turning a blind eye to corporate tax avoidance?” he asks. “It’s no longer possible to justify that position.”

Despite these risks, there are reasons for Irish people to be optimistic. Aside from a growing economy, a dynamic political landscape, and a young population, their country also performs at or above OECD average in measures of educational attainment, life expectancy at birth, air and water pollution, and sense of community.

It’s true that external forces could pose a risk to Irish growth. But these same risks could represent opportunities for a country that has proven adept at defying others’ expectations. As the European Commission’s Hogan claimed, political and economic challenges like Brexit “may present Ireland with the chance to seize the next phase in our development and maturity as a sovereign state.” But as he warns, “given the stakes involved, we need to seize that challenge now.”