Is Ireland In The EU Or The Americas?

by Jeremy Hetherington-Gore, Tax-News.com

26 April 2001

One EU Member State at least must hope that US Treasury Secretary Paul O'Neill was right when he annoyed EU leaders last week by saying that Europe couldn't insulate itself from the US downturn - and that's Ireland, which has been suffering from classic symptoms of over-heating, and is equally at odds with Brussels. Indeed, when the EU Commission warned Ireland last month that it needed to take measures to dampen its economic miracle before it came to a sticky end, politicians in Dublin told the Brussels bureaucrats to mind their own business.

Who is right? Well, maybe everyone is right. Remember that map of the world as seen from California, looking eastwards, with Kansas City quite prominent, New York looking rather small, and Europe just a speck on the horizon? Seen from Brussels, America looks a lot less imposing or economically threatening than it does from Dublin. European Central Bank head Wim Duisenberg says that because Europe is a self-contained trading bloc of 300 million people, it will hardly feel the problems of the US, and he is probably right for the burghers of Dusseldorf and Vienna.

But Ireland is a very open economy, exporting 78% of its GDP in 2000 - and much of this activity is fuelled by foreign investment, especially from the US, which accounts for half of all Ireland's exports. One fifth of those exports go back to the US. So, seen from Dublin, the US looms very large indeed, especially in technology, and this is of course the US sector that has been hit harder than any other. It's obvious that Ireland's boom will be dented, if not halted in its tracks by an American recession.

This may be good news for Ireland, if it is not too severe. The headline inflation rate for March was 5.4%, higher than interest rates even without the now-inevitable ECB cut; private sector debt has soared from 44 billion euros in 1997 to 111 billion at the end of 2000; unit labour costs are expected to rise 4.2% this year, compared to a euro-zone average of just 1.2%; and growth is predicted to remain at 7% this year, albeit down from last year's unsustainable 10%.

So far, however, there are only moderate indications of a problem True, Intel has halted work on its new semiconductor factory outside Dublin, laying off 1,500 construction workers until January, yet the company still employs 3,500 workers in Ireland, plus 1,500 sub-contractors. Some key indicators have dipped, including measures of consumer confidence and the level of recruitment advertising. Property prices have levelled off.

Now though it seems as if the technology tide in the US may be turning, and if that is true then Ireland may have been given just the right dose of anti-inflation serum to set it on a sustainable growth path.

So, maybe Messrs. O'Neill, McCreevy and Duisenberg are all of them right. Economics can be a very confusing business.

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