Ireland, EU Conclude $113 Billion Bailout

Negotiators for the Irish government and the European Union put the finishing touches on an €85 billion [$113 billion] bailout for the beleaguered country over the weekend. The agreement follows Ireland’s somewhat reluctant acceptance that the situation with its banks had reached the point where its resources alone would not be sufficient to solve the country’s economic crisis.

The EU had reached the point where shoring up Ireland had become a matter of necessity for salvaging the euro. However, according to most reports, whether it has succeeded in doing so remains questionable, as Portugal and Spain are increasingly subjected to economic pressure. See related article.

Whether the salvation was worth the price only time will tell. After three years of budget cuts and belt tightening, the Irish people are now being asked to undergo yet more economic stress, which could well will persist into the distant future. A number of them took to the streets in protest.

The bailout was certainly the elephant in the room at a conference in London last Thursday, sponsored by the Industrial Development Agency (IDA) the Dublin International Insurance Management Association (DIMA), and the newly formed International Financial Service Center (IFSC).

In his opening remarks John Bruton, the IFSC’s president, former Taoiseach (Prime Minister) of Ireland and the former Ambassador for the EU to the U.S., sounded an upbeat note. “The economic crisis has forced us to face up to things,” he said; such as the excesses which caused the banking crisis.

He likened Ireland’s current difficulties to those experienced during the Asian crisis, and similar financial problems in Canada and Sweden. “All of whom,” he said, “came out of their respective financial crises in much stronger positions.”

Bruton also addressed the corporate tax issue, as well as the strengths the Irish business model offers to potential foreign investors. The corporate tax of 12.5 percent has been under pressure, notably from France and Germany, as an unfair advantage. But has been a cornerstone of Ireland’s growth since 1956, and all of the political parties in the country have pledged to keep the lower rate.

The advantages Bruton detailed are by now pretty well-known: a highly educated population, essential for high tech and financial institutions; the English language, which is essential for international businesses, a “friendly” business environment, and comparatively easy access to regulators, as well as membership in both the European Union and the Euro Zone.

As DIMA’s CEO Sarah Goddard pointed out in a recent interview, all of the above, and not just the low corporate tax, have combined to make Ireland in general, and Dublin in particular, one of Europe’s major re/insurance hubs.

In addition to the re/insurance sector, Ireland is home to a number of other businesses, including pharmaceutical firmssuch as Pfizer; high tech companies -Microsoft, Intel, Dell, Google and Facebook – and aircraft leasing. Bruton noted that 32,000 people work in financial services, including insurance. The sector, according to Danny McCoy, a director general of the IBEC, contributes about 7.5 percent of Ireland’s GDP. Around 70 percent of Irish exports are directly related to foreign investment, led by U.S. companies.

In the Irish view the tax issue is somewhat of a “red herring.” “Ireland competes with countries like Switzerland, Singapore and Israel [for new business]” he said, “not the European Union.” In fact a number of eastern and central EU members have lower tax rates than Ireland, as they are following its model in their bids to expand their own economies.

Whatever the French and the Germans might think, it’s highly unlikely that companies, currently domiciled in Ireland, would move to either one of them if the corporate tax rate were increased. The danger is also slight that they might move elsewhere entirely. However, what the Irish government wants to prevent is a decrease in expansion and investment that an increased tax rate might trigger.

Ireland’s austerity budget and recovery plan, which was crucial in securing the bailout, projects a 2.7 percent growth in GDP through 2014. That’s a fairly ambitious, some economists have said unreachable, figure. In order to have any chance of achieving it, Ireland must continue to attract foreign investment.

The conference, held in the auditorium of the Willis Building, was designed to show that, despite its current economic difficulties, Ireland remains a good place to establish businesses.

Topics Europe