Did Irish Austerity Really Lead to an Increase in Competitiveness?

irish austerity

Ever since the austerity programs began in Europe after the crisis of 2008 Ireland has been a poster boy. Even though the economy has crumbled enthusiasts still point to the improved current account balance which they claim is due to an increase in exports which in turn is due to an increase in competitiveness. In actual fact this is a myth; much of the improvement in the current account balance is due to foreign corporations washing profits through the country and the rest is due to a fall in consumption.

In order to get a grasp on this we first have to understand what has happened to the Irish current account balance since 2008. In order to do this we have to break it down by sector. In the graph below we see the balances on merchandise and services, the two main components of the current account that have changed most substantially since the austerity began.

Irish CA Balances BY SECTOR

As we can see, the story of the recovery of the Irish current account has two parts. The first runs from 2008 to 2009. In this period net merchandise exports increased substantially. This was not, however, due to any obvious increase in competitiveness. Rather, as we see from the graph below, it was due to a fall in the consumption of merchandise imports from abroad due to diminished incomes.

Irish CA Balance MERCHANDISE

But even after net merchandise exports increased the current account was not yet in balance, let alone in surplus. In order to push it over the edge net services exports had to swing dramatically from deficit to surplus between 2010 and 2012.

So, the question arises as to what caused what is by all accounts an incredibly dramatic swing. In order to see this we must look at the chart below which breaks down the services balance into its components.

Irish CA Balance SERVICES

As can be seen, the main component that swung the services balance from a deficit in 2010 to a surplus in 2012 was ‘Computer Services’ which increased by about €10bn in just two years.

The problem with this, however, is that a good deal of this component is likely due to international corporations like Microsoft, Google and Facebook washing their profits through Ireland to avoid paying high corporation taxes.

The Irish business and financial website Finfacts broke this down extensively last year. One of the examples that it cites is Google but there are many more:

In 2003, Google Ireland had no revenue but in 2010 it reported revenues of €10.1bn (US$12.9bn), up €2.2bn on 2009. Google Inc reported worldwide revenues of $29.3bn. Most of Google Ireland’s revenues relate to advertising revenue raised in countries outside Ireland. It’s booked as an Irish export but it’s not an export as traditionally understood. Today, companies like Google can carve the world into a small number of single markets with revenues booked in low-tax jurisdictions that are unrelated to the economic activities in those locations.

Looked at this way, it seems that it is not competitiveness that brought the Irish current account back into surplus at all. Rather it was a combination of decreased consumption of foreign merchandise imports as Irish income fell and foreign corporations washing their profits through the country to avoid paying high rates of corporation tax.

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About pilkingtonphil

Philip Pilkington is a London-based economist and member of the Political Economy Research Group (PERG) at Kingston University. You can follow him on Twitter at @pilkingtonphil.
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3 Responses to Did Irish Austerity Really Lead to an Increase in Competitiveness?

  1. Robert Browne says:

    I live in Ireland and as you read on you will see that I am not a paid government propagandist. Most government workers appear to realise that if they are to remain within, and to continue to receive the salaries they have been guaranteed under Croke Park I (2010- 2013) and Haddington Road (2013- 2017) agreements, they must play their part in the ‘bailout exit conspiracy’ by becoming habitual liars.

    Ireland has pre borrowed 24bn euro on which it is paying 48 million euro a month just to hold. We are spending around 1.25bn monthly of this pre borrowed money to continue to run the state, so work it out. How long it is going to last? Ireland’s present government are boasting that “we got the country out of the bailout” this is a joke, but a serious joke, as they have local elections to fight May 2014. Coincidentally, exit period when we are “out of the bailout” coincides with these elections. These elections are important because they will have a major influence on the results of the next General Election.
    That election too will have to be fought during the window of opportunity offered by the bailout exit myth. This election must be fought and won before the ordinary person realises that Ireland is heading for Bailout II, indefinite austerity and indefinite rule by supranationals. The finance minister is as aware as we are that Ireland will not be allowed to fail as they have been heralded as the best most obedient and servile boys and girls in the austerity class.

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