What do we really know about Ireland? Besides beer, with Guinness as a symbol, rugby, and leprechauns in the collective imagery, we think of the crisis of an entire State and of the large companies based on the island to take advantage of its low taxation. Crisis and large companies, it sounds like an oxymoron, but it was not.
In the past years, the Irish state has known a huge economic growth, mainly due to high the dynamicity of the system, characterized by an unobtrusive bureaucratic apparatus, a legal system that guarantees legality in the protection of contracts and, above all, a 12.5% flat corporate tax, not a “contract on a personal basis” system like the one Juncker applied in Luxembourg (which was an actual beggar-thy-neighbors management type), but a secure system that was equal for all and has pushed many companies to settle on the island.
The tax system is also characterized by the tax exemption of “copyright”. The absence of tax on intellectual property and the protection of the latter by mandatory legislation, such as the one coming from the elaboration of the European Union, has encouraged the opening of businesses in the so-called advanced tertiary sector, especially in software production.
The rapid economic growth, however, was also the main cause of a crisis that began in 2007 on the island. High growth rates attracted many citizens in search of job and business opportunities, increasing applications for residency and housing; it provoked a real estate bubble, destined to explode with a financial crisis. Estate became overvalued and sales dropped in conjunction with the reduction of business; Banks found themselves overly exposed from the points of view of loans and finance, which resulted in a dramatic liquidity crisis that forced the state to intervene to prevent the system from failure.
The introduction of public liquidity, though necessary, swelled the debt/GDP ratio, from about 25% in 2007 to over 65% over a few months, hitting 120% in 2012.
To support national economy and avoid default, wary because of the crisis, already in 2008, EU and IMF allocated several billion euros; nearly 100 billion Euros were allocated with the obligation clause to bring the deficit below 3% of the GDP by 2014.
Irish authorities, seeking revival, took the path of cutting expense, so as minimize taxation, avoiding to weigh on citizens and on the industry. A form of austerity was adopted, rather different from the one Monti imposed on Italy, suffocating the country with an unprecedented high tax burden, but allowing Ireland to slowly break the deadlock already in 2012.
Today, the economic data show that the “cure” should have taken effect, Ireland marks a forecast of GDP growth in 2015 at 26.3%, already well above the excellent 7.8% previously estimated, and more than any other data provided by national economies worldwide; while the debt/GDP ratio starts to fall below 80%, marking a return to stability and sustainability of public finances, and unemployment rate falls below 8%, almost half of the rate registered in the most critical years.
This result has been reached by the obstinate reluctance to touch tax levy, keeping its rate “light” especially on businesses, which has allowed foreign investment not to drop even in the darkest phase of the crisis.
It is true that such surprising data need to be handled with caution, because the Q 2016 ended with a decline of more than two percentage points on the previous year, which is physiological after a boom like that, and YtY would see a growth of “only” 2.3%, which is still well above the growth rates everywhere in Europe.
Nonetheless, a shadow can be seen in the growth of private debt, which grows even exceeding 200% of GDP, which could be the indicator of a new growing bubble, if seen from another perspective, as an improvement in medium-long term expectations.
The Irish example probably shows that there is a real alternative to the policies applied in Italy, conducted on “tax and spend. It exists and it is definitely more effective than the palliatives that have been put in place by the last governments.