Pots Of Gold, Leprechauns Or No

Ireland has been a eurozonegrowth powerhouse in recent years, and remains strong, despite Brexit.

In the years since it had to be bailed out during the financial crisis, Ireland has become the poster child for Europe’s economic recovery, growing faster than any other eurozone member. Still, the latest revised official statistics beggar belief.

In 2015, the Irish economy expanded by a whopping 26.3%. Investment was up by 28.2%, exports by 13.8%, and imports by 16.4%. Industrial production grew by 17.5% over the previous year. Dublin’s stock market valuation rose by 30% in 12 months.

“Ireland continues to experience a robust, employment-driven recovery that began in 2013,” says Kallum Pickering, senior UK economist at Berenberg Bank. However, along with many other observers, he notes that official statistics are distorted by tax-reduction strategies of large multinationals, most of them American. Multinationals like Apple are reportedly relocating more of their intellectual property assets to Ireland to benefit from its low corporation tax. The same goes for companies booking profits to Irish-based subsidiaries from manufacturing elsewhere in the world, and from tax-driven reverse takeovers. Even without these distortions—characterized by US economist Paul Krugman as “leprechaun economics”—Ireland’s economy has been powering ahead.

But Brexit could change all that. Pickering notes that “around 20% of Irish exports go to the UK, so any economic weakness there—and the terms of its eventually leaving the EU—will have a significant impact on Ireland.”

Most economists polled by FocusEconomics, a research and forecasting firm, agree that Brexit has negative implications for Ireland, with lower FDI in future. Their consensus GDP growth forecast is now slightly lower, at 4.9% for this year, dropping to 3.9% in 2017. The latest Irish purchasing managers index and consumer confidence indexes have fallen sharply since the Brexit vote.

Yet there is upside potential. “Should the UK lose some of its access to the European market for services—particularly passporting rights in financial services—some multinationals might seek an alternative base for their European HQ,” says Pickering. “Dublin may be the main beneficiary of any such shifts. It’s an English-speaking environment, in the same time zone and culturally close to the UK, so there would be less disruption.”

That could boost FDI into Ireland, which, as Joseph Quinlan, author of a report for the American Chamber of Commerce in Ireland, points out, accounts for more than 20% of all US FDI into Europe.

But Pickering sees Brexit as threatening Ireland’s appeal to global investors: “Should Britain become even more business-friendly, lowering corporate taxes to offset leaving the EU, it could attract even more FDI and take some away from Ireland.”

Tighter immigration and tariff controls at the currently open border between the Republic and Northern Ireland—the only land border between the UK and the EU—could also have a negative impact.

Pickering says “nobody wants a hard border,” but it could become a political landmine. “The demographics in Northern Ireland” he notes, “point to a Catholic majority within 10 years, which could trigger a push for unification.” The Protestant Ulster Loyalists would most likely fight that.