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Ireland: Small EU Member State Too Big A Success?

  • Breffni O'Rourke

The Republic of Ireland, an economic backwater only a generation ago, is now the most vibrant economy inside the European Union. It's become a focus of attention for EU candidate member countries from Central and East Europe that aspire to the same success. But there are also problems looming for Ireland -- precisely because it has achieved so much so quickly, as correspondent RFE/RL Breffni O'Rourke writes in the first of a two-part series. The second part in the series will focus on Greece, another small EU member which is still finding its way forward.

Prague, 15 January 2001 (RFE/RL) -- The Republic of Ireland is a major success story. It's known as the "Celtic tiger" because of its phenomenal economic performance. Economic growth in the year just past is estimated to have been over 8 percent and unemployment is down to 3.7 percent -- far below the EU average.

A mere 25 years go Ireland was a backwater, with a largely rural and moribund economy. Its society was scarred by generations of excessive emigration, and by centuries of periodic conflict with the former ruling power, Britain.

What were the factors in Ireland's success? The ingredients, considered separately, are common enough. But Ireland managed to hit the right combination at the right time.

They consisted of strong government incentives to attract foreign investment, coupled with a priority program to educate Ireland's youth, plus high productivity and wage restraint by Irish workers.

Add to that a heavy dose of economic help from the European Union and access to the huge EU single market.

Mix in with that the use of English as the primary language, plus political stability. Yes, political stability -- because the continuing troubles in British-ruled northern Ireland have never really shaken the republic.

Increasingly, this combination of factors has drawn investment, in particular from U.S. companies seeking a stepping stone into the EU. As Dublin-based investment adviser Tim Walsh tells RFE/RL:

"The pattern over recent years has been that we have been able to tap significantly into this huge expansion into [global] technology investment that has taken place. We have always had a good presence of technology companies here and they have in fact been expanding in Ireland along with the [overall] growth in the technology sector."

Ireland has become a leading center for the computer and pharmaceuticals industries, but has also managed a degree of diversification in its economic activity into areas which include international telephone-marketing services and bicycle-making.

Alva O'Cliarigh, a spokeswoman for the Irish Finance Ministry, says that over the past decade financial support from the EU's structural and cohesion funds, totaling some $10 billion, has been important in building up the necessary physical infrastructure and social conditions. She says:

"You could not say [the EU funding] was the sole reason [for Ireland's success], but certainly it has been one of the key reasons why the economy is so much better [now]. The investment and infrastructure which we were able to get from the EU over that period was critical -- even for education and human resources -- was critical at a stage when we were trying to develop our economy."

O'Cliargh says as Ireland continues to prosper, there will be a reduction in EU funding support. But a national development plan has recently been drawn up which adopts many of the approaches which were used in administering the EU assistance.

Dublin's success in effectively using funds from Brussels has attracted wide interest among the 10 Central and East European candidate countries, many of which have sent delegations to study the Irish model. As O'Cliarigh puts it:

"We will be doing whatever we can to assist the accession countries in putting procedures in place. We have had quite a lot of delegations from all the accession countries looking at how we manage our EU funds here, and what we have spent the money on, so as much as possible, we try to facilitate and assist the countries in looking and learning from what we have done here." But good times in Ireland are now under threat -- not from any economic downturn, but rather through too much success. As analyst Connell MacCoille of the Economic and Social Research Institute says, acute labor shortages have led to private-sector companies offering pay rates well above those agreed upon in Ireland's collective wage bargaining process.

MacCoille says this led to wage acceleration in the private sector of the order of 10 percent last year. That feeds inflation -- a dangerous phenomenon now that the Irish central bank has no power to increase interest rates to cool such overheating. As a member of the EU single euro currency, Ireland must let the European Central Bank in Frankfurt set an interest rate for the entire zone, and the ECB will not change rates because little Ireland is overheating. That's one of the drawbacks of the "one size fits all" approach of the euro.

Analyst MacCoille says the so-called "virtuous circle," where all of the positive factors reinforce each other in the Irish economy, appears past:

"The virtuous circle is over. We are more into a 'vicious circle' now where you might get into a wage-inflation spiral, and the problem with that is that our competitiveness could be eroded significantly if that occurred".

MacCoille says in that event, companies based in Ireland could decide to move elsewhere -- for instance, to Central or Eastern Europe.

In addition, he says, the wage acceleration has led to what he calls a "massive inequality" between Ireland's private sector and the public sector -- which remains controlled by collective wage agreements, and which is therefore being left behind.

As more than a third of the workforce is engaged in the public sector, this of course leads to tension in Irish society.