We may celebrate our independence, but the truth is that the Celtic Tiger is an American creature and operates within parameters largely set by Europe, writes Michael Casey
Commentators have recently suggested that the Celtic Tiger is the crowning achievement of Irish independence and economic nationalism; in other words, we ourselves, by our own efforts, have brought about the fastest-growing economy in Europe.
Sadly, this is wishful thinking, not merely because the policy of "sinn féin" (the concept, not the party) was inconsistent with free trade and any form of globalisation. It is also incorrect because our rapid growth has everything to do with US multinational investment in Ireland and hardly anything to do with our own domestic activities, which tend to be low-tech, sheltered and uncompetitive.
On the face of it, Ireland does seem to have lost more autonomy than most other countries to the point where we have very little influence on our economic destiny. Decisions in Europe have had powerful effects - not always for the better - on Irish agriculture, fishing and industry. Structural and cohesion funds have impacted on agriculture and infrastructure. Other forms of European legislation have had a pronounced influence on our social, legal and foreign policies. These, in turn, have had indirect effects on the economy.
Many pundits thought breaking the link with sterling was an act of growing economic independence. One commentator at the time felt that it was the financial equivalent of the Easter Rising. But it didn't last very long. We went into the European Monetary Union, which meant we no longer had an exchange rate to call our own, or even a currency. It goes without saying that we cannot devalue or revalue the euro. We have no control over interest rates and it is well accepted in official circles that interest rates should have been much higher here than in Europe because of the overheating property sector, higher inflation, and so on. Senior policymakers were quite reluctant about Ireland joining EMU while the UK stayed out. In the event, we went from the UK currency union to the European currency union with hardly time to draw breath. In retrospect, it seems prospects for Ireland successfully fielding an independent currency were not rated very highly.
While the EU hasn't got around to harmonising tax rates, it has considerable and growing influence in that area. While it was easy for finance ministers to offer up central banks on the altar of European unification, it was and is another matter for them to cede fiscal autonomy to the centre. No minister wants to go to Brussels to have his budget approved. But a lot has already been centralised in the fiscal area: for example, the budget deficit provisions, under which Ireland has already been sanctioned, although some of the bigger countries were let off with a caution. Ireland has recently been prevented by Brussels from grant-aiding multinational companies here. It is likely that fiscal harmonisation will proceed further over coming years, possibly on a two-track basis, and could encroach into the sensitive area of corporate tax rates.
As much as 80 per cent of "Irish" manufactured output comes from multinational companies located here. Allowing for multiplier effects, it is likely that over half our annual growth rate is attributable to decisions made abroad - in America, Europe, Japan and the UK, with the latter increasingly important in multiple retailing throughout Ireland. An even more striking example of economic dependence is the fact that a relatively small number of foreign companies located here account for over 60 per cent of our merchandise exports.
We provide the labour and the tax incentives but all important entrepreneurial decisions are made abroad, including, of course, decisions about relocation based on competitiveness. The Celtic Tiger is not Celtic at all; paternity can be claimed by the US.
People used to complain about the IDA hoarding in Dublin airport which showed a TCD class of fresh-faced graduates over the caption, "We're the Young Europeans. Employ us before we employ you."
The complaint was based on the fact that by the time the hoarding was erected, half that class had emigrated. While that criticism would, thankfully, not be relevant today, the other "message" of the ad is still valid, ie we may be good workers but we do not aspire to entrepreneurship or to owning our own businesses. In other words, we seem to be content with the notion that important decisions about job creation (and destruction) continue to be made abroad.
Some might contend that we retain autonomy in respect of the annual budget and social partnership. These two events are, however, marginal in terms of overall economic policy. The budget is constrained by European rules and regulations and is, in any case, a rather limited exercise in redistribution, despite all the discussion that surrounds it. Where spending on infrastructure is concerned, and this is a matter for domestic decision-making, the results leave much to be desired.
Social partnership has very little effect on actual wages. Some years ago market forces gave rise to wage increases of over 6 per cent on average. The agreed partnership figure for that year was only about 3 per cent. Everyone said there was some drift that year. It wasn't drift. The buoyant market determined an outcome that greatly exceeded the norm. The national agreement was and is largely redundant and will always be overruled by the market, unless the social partners happen, by coincidence, to fix on a figure that the market is going to deliver anyway. Remember also that the multinationals and a large swathe of the private sector are essentially outside the process.
Since our exports and imports add up to a figure which is a massive 170 per cent of GNP, we are at the mercy of world trade - and of international capital flows, including US investment.
At the risk of oversimplifying, we've given away our demand-side policies to the EU and our supply-side policies to the US, leaving us with very little autonomy indeed.
Like the curate's egg, this isn't all bad. When the world economy, and particularly the US, is doing well we will do very well. In this regard, the "Celtic" Tiger period coincided with an unprecedented sustained growth performance in the US. Many influences coming from the US and EU are helpful but there are a number of downsides, the most pervasive of which is complacency induced by extensive reliance on US entrepreneurship and research and development. We have become, like Blanche DuBois, dependant on "the kindness of strangers".
Perhaps the most serious downside is the risk of becoming a client of the superpower. A recent example of this is the permission given to the US to use Shannon airport for troop movements. We depend so much on American goodwill that we cannot afford to have a foreign policy of our own, even on important matters such as war.
The assimilation of US industry implies the assimilation of American culture and values up to a point. We see this all around us in our daily lives. It is probably no coincidence that the distribution of income here is probably closer to that in America than it has ever been in the past. This reflects the American economic philosophy of unrestrained capitalism which, broadly speaking, we have also adopted.
There are probably about 10 or 12 multinational companies in Ireland that could exercise extraordinary leverage over an Irish government. If any one of these companies pulled out of Ireland, the economic consequences for employment and growth would be so severe that any government would probably fall. Such power is unhealthy in a democracy.
The EU may move to harmonise corporate tax rates at some stage or the US might rethink its policy on international tax agreements. A large part of the tax which our Government gets has been rerouted away from governments ofother jurisdictions. In absolute terms, the amounts of tax lost to other governments are low enough to be below their radar, though very important to us. The day may come, however, when these tax losses may begin to attract the attention of other countries. The EU and US, our two mentors, could begin to pull in opposite directions, creating a dilemma for us. An example of this was the recent withdrawal of grants to US multinationals, based on an EU directive. The world trade talks could also give rise to a difference of opinion between the two power blocks, thus forcing Ireland to choose between them. What if the EU pressures us to implement more egalitarian policies while America continues to espouse an aggressive form of capitalism? If forced to choose between Berlin and Boston, what do we do?
Economic nationalism is probably not a viable concept nowadays in a globalised world, but Ireland seems to have less autonomy than most other countries, given our dependence on world trade, international capital flows, US investment, and EU policy decisions. This does not mean we are heading for trouble, but it does mean we should not delude ourselves into thinking that a policy of "sinn féin" has worked, or that we can fix things if the world goes into recession.
It is important to understand that, although we have good relations with the EU, including Britain, and with the US, the world does not owe us a living.
It is essential that we maintain competitiveness and that we seek to become an important niche player on the world stage.
There is also the question of additional unification of Europe. Maybe an EU constitution is a step too far.
As we began to lose autonomy, and as the scope for domestic policy action shrank, the economy began to perform extremely well. The other side of that coin is that when we did have considerable control of our own destiny, the economy virtually stagnated. The inference is clear enough. The leaders of 1916 would have expected us to do more with the freedom they won for us.
Michael Casey is a former chief economist with the Central Bank