Ongoing Brexit talks have highlighted the many difficulties that lie ahead, for all parties involved. In particular, the Republic of Ireland has insisted that any future relationship should ensure “regulatory alignment” between the governments sharing the island of Ireland. Dublin’s reasoning is understandable: much of its trade crosses the 310-mile land border with the UK, so maintaining the border’s “invisibility” is integral to the island’s economy, not to mention its ongoing peace process.
Indeed, much has been said about the consequences of Brexit on Ireland. However, far too little attention has been given to the threats posed to Ireland by continued EU membership. This blog post provides a primer on how EU membership has benefited Ireland so far, and how these benefits cannot last if Ireland remains a member state.
The boom years
Prior to the Great Recession of 2008, Ireland had a booming economy, affectionately called the Celtic Tiger. This was the result of a handy combination of factors, some of which had roots reaching as far back as the early postwar era.
Starting in the 1960s, the Irish government began to invest heavily in secondary education, eventually producing a highly skilled workforce, which, combined with relatively high unemployment and depressed wages, helped Ireland become an attractive market for US companies to set up operations.
To seal the deal, Ireland also adopted (and still has) very low corporate taxes, and, since 1973, broad access to the European Economic Community (EEC). It’s no wonder American industrial giants such as Merck decided to move European operations there early on, followed by other pharmaceutical or technology companies including Facebook and Apple.
Seen this way, EU membership (and membership in the EEC before that) have benefited Ireland enormously. Its skilled, English-speaking workforce combined with low taxes and unfettered access to hundreds of millions of Europeans made the Tiger roar, and continues to benefit Ireland in its recovery from a deep recession in 2008.
This said, Ireland can only have its cake and eat it for so long.
Is the Tiger becoming endangered?
So far, the degree to which EU member states have converged politically and economically has suited Ireland. However, the pillars on which the Celtic Tiger depends are not equally stable.
The Irish workforce will continue to be skilled, and the country maintains significant clusters in the technology, pharmaceutical, and financial industries. However, if Ireland wishes to maintain access to EU markets, it will probably have to lose its corporate tax advantage over other member states in the longer term.
Since last summer, French President Emmanuel Macron has been laying out his vision for fiscal convergence between EU member states. Having already formed a monetary union, the argument goes, it is only natural that the eurozone have a common budget, finance minister, and set of rules that all members must play by, including tax rates.
At the same time, the European Commission has aggressively targeted US firms headquartered in Ireland for tax evasion. The Commission ruled in 2016 that Apple must pay 13 billion euros in back-taxes, deeming Dublin’s treatment of the company (very) preferential.
Predictably, the Irish government opposed this ruling vehemently, and has now been referred to the European Court of Justice by the Commission for not collecting the bill from Apple. It’s clear that Dublin sees newfound activism in Brussels as a serious threat—if Apple must pay, it and other corporate giants might not see much point in headquartering in Ireland. After all, there’s a lot more talent to be found on the continent, so why bother with little Ireland if it no longer presents any real tax advantage?
How fiscal convergence, and continued activism by the Commission plays out will be revealed in time. However, what recent developments make clear is that deeper European integration poses a serious threat to Ireland’s business model. The Tiger may yet become an endangered species.
Would Irexit help?
With key ingredients in Ireland’s recipe for prosperity under threat, Dublin needs to think outside the box for long-term solutions.
One approach would be to shift away from the single currency, or towards Norway-style membership in the European Economic Area. This would ensure continued Irish access to EU markets, while distancing it from imposed tax reforms or fiscal union designed for the eurozone.
Depending on the outcome of Brexit negotiations, another option might be to follow the United Kingdom out of the EU (Irexit). This would free Dublin’s hands to land a bilateral agreement with Britain on maintaining a seamless border. However, the amount of market access this would guarantee Irish or British companies remains unclear.
In any case, continued EU and eurozone membership is starting to pose important threats to the Irish economy, meaning tough questions will have to be asked and eventually answered. This is especially true in the current context on the continent. With a virtually endless (and growing) list of threats to the European project emerging in recent years, Ireland might be better off siding with the devil it knows (closer partnership with the UK) than the devil it doesn’t (deeper European integration).