For a country of roughly 5 million people, Ireland punches far above its weight economically. Its gross domestic product — the value of goods and services — of €426.3 billion ($457 billion) in 2021 says far more about the health of multinationals like Apple Inc., which have been drawn to the low-tax economy, than about the prosperity of its people. Strip out the impact of several accounting items such as foreign-owned intellectual property, treated as a payment for services even as no domestic value gets created, and you get to €233.4 billion — about half the headline figure.
The phenomenon, famously dubbed “leprechaun economics” by Paul Krugman in 2016, has persisted even as some of the most egregious international tax loopholes get closed. The Irish central bank, to its credit, has worked hard to de-pixiefy the economy with new accounting measures. But leprechauns are clearly resilient in a world where an iPhone made in China can distort Irish GDP, as economist Brad Setser, a senior fellow at the Council on Foreign Relations, a Washington-based think tank, has shown. The Bank of Ireland said in 2021 that GDP “is likely to overstate the underlying rate of growth in the Irish economy by around threefold.”
This may seem like an arcane quirk, but it has consequences far beyond Ireland’s borders. It’s had an outsized impact on the reported performance of a euro-zone economy that’s been scarred by the pandemic and the energy crisis in quick succession. As the above chart from ING Group NV economist Bert Colijn shows, on average, since 2021, Ireland has been the fourth-biggest contributor to the rate of change in quarterly GDP, just behind France and Italy.
After much back-slapping when Irish preliminary GDP of more than 3% effectively “saved” the euro zone from recession at the end of last year, the revision of the figure to 0.3% meant the euro zone’s final growth rate was zero. Recent industrial production data for the euro zone would have been negative but for Ireland. And it may also be that Ireland is flattering the output outlook for this year, which the ECB has revised up to 1%, from 0.5%, driven in particular by exports — which accounted for two-thirds of Irish growth last year.
This is data that’s hard to escape. If it’s part of the impetus for interest-rate increases — however aware the ECB is of Ireland’s economic contradictions — it will effectively reflect the momentum of multinationals outside the euro zone while inflicting the pain of tighter credit conditions on domestic economies that are already slowing.
This is not to say that Ireland is a full-on phantom economy. There are real success stories, like the billionaire brothers behind payments company Stripe Inc., even if most of its success has taken place in California. Companies like Pfizer Inc. and Intel Corp. also have manufacturing facilities in Ireland, not just intellectual property. Ireland’s unemployment rate of 4% contrasts strikingly with its 15% level in the early 2010s, when it needed a European Union lifeline amid the debt crisis that engulfed countries like Greece.
But there is still too much confusion in Ireland’s economy, which has repercussions for the rest of Europe. Ireland is in a technical recession, using the indicator of “modified domestic demand,” despite its resilient GDP. It is highly dependent on the whims of multinational tech companies that are currently slashing costs and which seem to be reshuffling their supply chains: Professor John FitzGerald of Trinity College Dublin points out that a shift of Apple’s manufacturing to India and away from China might have an impact on Ireland down the line. Fairer global taxation of multinationals may also threaten Dublin’s corporate-tax war-chest in time.
Perhaps now is the time for Ireland to invest its windfall in boosting its domestic economy: More spending on housing, education and skills would create a more balanced model, says economist Gerard Brady at Irish business lobby Ibec. It might also help avoid a recession. Until then, treat Irish economic data as mixing fantasy with fact.
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Lionel Laurent is a Bloomberg Opinion columnist covering digital currencies, the European Union and France. Previously, he was a reporter for Reuters and Forbes.
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