I see the news calling Ireland the neew Greece with a completely broken economy but they never seem to bother telling me why it’s happening. Greece is in the crapper because they lied about their finances, what’s Ireland’s deal?
Spent all their money on whiskey.
A housing bubble + tax haven based on international hot money that collapsed. Background on their budget.
tax haven based on international hot money that collapsed. Background on their budget.
I don’t know what you mean by this. Interest rates are set by the ECB so there’s no benefit to specifically Irish lending. Especially as our banking sector could never even support international lending.
And we’re not quite a tax haven, as there is corporation tax. It’s low, but mainly attracts people interested in operating in the EU. I think the biggest impact it has on American tax revenues is probably with the pharmaceutical industries as we do export pharmaceuticals to America. (This is important for profit repatriation because while there is some transfer pricing, there isn’t a huge amount of it.) Apart from that businesses in the service industry and high tech manufacturing for the EU take advantage of it. There’s some financial sector operation here, but London and the lax British laws on the financial industry make it much more appealing to that sector. A fair amount of the big businesses have their European headquarters here, Google being one of the most famous attractions we’ve made.
As for there being a low level of tax in Ireland, that’s not completely true. Lower rate for people earning less than the Average Industrial Wage is about 25% all in. For the higher rate it’s nominally 41% (Which is why people think it’s low) but there’s anywhere between 2 and 5% as a “Health Levy” and Pay Related Social Insurance of about 4%, with an employer contribution of about 10%. Then there’s the income levy (which is basically taxation on all income seperate to the normal income tax) which ranges from 2% to 6%. The other big tax intake is from VAT which is at 20% except for things like books which I believe is at a lower or 0% rate, and school clothes for kids, which is also at 0%. Then there’s duty on alcohol and cigarettes (the average price of a pint is about 4.50 with half of that being duty and there being VAT on top of it.) Cigarettes are €8.55 a pack, with about €6 of that being tax. Stamp duty on house sales was a big earner in the past at about 8% on the value of the house. There’s Vehicle Registration Tax (VRT) at about 25% on the cost of a new car, plus VAT, plus Duty if it’s imported from outside the EU. Plus an annual Motor Tax which is between €200 and €1000 a car. And then there’s Capital Gains Tax which I don’t know about, but is basically payable upon the realisation of any asset which increased in value since it’s purchase (second homes, stocks and shares, etc.)
So, what I take from that barely readable list of taxes is that although Ireland has a reasonably low simple rate of tax on income, there’s a huge amount of additions on top of that.
And something to note about all that that is slightly topical is that we don’t have UHC. It’s means tested, so the poorest and most people on social welfare don’t pay, so everyone else has private healthcare.
Basically, what happened to us was a housing bubble, along with a huge amount of unscrupulous lending to large property developers who are now going bankrupt with billions owed. The state has to recapitalise the banks to keep them operating. There was huge levels of corruption in the banks, far beyond any other country in the world, but unfortunately skirting legalities so we have no recourse (even if the perpetrators could pay the money back, which they can’t.) Along with this the global economy taking a downturn meant a huge amount of businesses left Ireland, with massive levels of unemployment. On top of that is the fact that Ireland is an extremely expensive place to live, necessitating high wages, which means a lot of unskilled and semi-skilled workers have virtually no option. At this point, if it wasn’t for the Euro we’d have dumped loads of cash into the economy and completely devalued our currency, but that’s simply not an option.
Yes, the blog author has offered a mea culpawrt corporate taxes.
This thread could use more leprachaun jokes.
The Irish keep gate-crashing. Lust will only get us so far now.
Well tell me where it all went wrong.
The housing crash you experienced in the usa has started to come home to roost here in europe also. Ireland has been especially hard hit, but i can see the same problems migrating over to the mainland uk before too long(maybe a couple more years for it to really hit hard?), at the moment it’s simply stagnating, but the real usa type crash has yet to bite, as it has in Ireland.
Banks, mortgage lenders and estate agents are to blame for it. I suspect there was some kind of price-fixing going on in the industry during the peak of the economy before the crash. That’s what happens with too lax regulation.
I find it really troubling that was once the strength of the Euro now becomes its biggest Liabillity: The inabillity for single countrys to devalue their currency to save their asses.
No idea where this will lead but when the German employment bubble bursts we will live in interesting times. I am a pessimist.
Krugman has been bemoaning this with regards to Spain for awhile now.
Looks like my mum was right about that whole “go to China because Europe is going bye-bye” thing she was always moaning about.
But it goes on & on & on & on & OOOnnn.
Thanks, sounds like it’s kind of like Spain’s housing crash.
I read an article the other day, I think in the NY Review of Books, explaining that the encouragement to build real estate was so strong during the bubble that developers built far more houses than there were people in the housing market in some Irish counties, hence large abandoned and half-finished developments many places, and consequent developer failures and loan abandonments.
And yet, if you have a strong enough government, and an understanding population, you can make yourself more competitive without devaluing. Estonia wasn’t in the Euro, but its exchange rate was locked onto the Euro so they could join next year. They had a choice: give up the Euro and devalue to improve competitiveness or keep it going and stagnate.
Well they took the third option: They devalued internally. People across the board accepted significant pay cuts. Two years later and Estonia’s economy is booming again (4.7% growth last quarter). They restarted their economy and they are set to become the first former Soviet state to join the Euro.
Coincidentlally Krugman has repeatedly got it wrong with Estonia. His most recent claim was that Estonia was going the way of Argentina. Like many others he lumps it in with the other Baltic states, even though they are ethnically, culturally, linguistically, politically and economically distinct. They are more like Finns than Latvians.
They were running a very tight ship until the collapse, even running a budget surplus. As an example, while an out of control property boom had houses in Latvia’s capital Riga selling for more than in London, Tallinn was the cheapest capital to buy property in the EU. The economy bottomed out largely because of investment running from fear of contagion and loss of exports to ruined neighbours.
Not so good in the fourth quarter
Economic growth in Estonia was higher than that recorded across the whole of the European Union (EU) in the third quarter of the year.
Flash estimates produced by the Eurostat statistics agency show that gross domestic product (GDP) among all 27 member states was up by 0.4 per cent between July and September compared to the previous three months.
By contrast, Estonia’s quarter-on-quarter rise in output was 0.5 per cent.
As to third quarter:
Gross domestic product expanded an annual 4.7 percent, the most since the fourth quarter of 2007, compared with 3.1 percent in the previous quarter, the statistics office in Tallinn said today. The median estimate of seven analysts surveyed by Bloomberg was 4 percent. GDP grew a seasonally adjusted 0.5 percent from the previous three months, after a 1.9 percent second-quarter expansion.
“Estonia’s export markets, the Nordic economies, are growing at a rapid pace, thereby giving strong support to the economy,” said Violeta Klyviene, an economist with Danske Bank A/S in Vilnius, in an e-mail. “Still, we cannot yet say whether this alone will be enough to achieve a sustainable growth level. It is clear that domestic demand is having trouble recovering.”
Estonia’s $19 billion economy has benefited from renewed demand for its electronics and machinery among the country’s key Nordic trade partners. Exports jumped 40 percent from a year earlier in September, the biggest increase in almost two years. The central bank and Finance Ministry said growth in coming quarters will depend on how domestic demand recovers.
The one-time effect from Europe-wide stimulus measures and from inventory buildup by Estonian companies “is fading,” the central bank said in the statement. “Therefore, near-term economic developments depend on a recovery in private consumption and investments.”
That high-growth third quarter had Estonia’s unemployment rate at 15.5%. I’d guess the much slower fourth quarter drove it up again, but I can’t find anything.
So yeah, instead of the horrors of devaluing you can…instead cut wages by a huge amount and endure amazingly high unemployment to get near-zero growth. I’m not sure what’s up with that 3Q jump; inventory rebuilding?
What did Krugman get wrong here? You can get out of a recession through grinding deflationary unemployment and wage adjustments; it has the same end effect as a devaluation for a trade-heavy economy. The argument is that it’s a lot faster and less painful to just devalue if you’re an international trade-heavy economy and stimulus otherwise, for a variety of technical reasons.
Oh my darlin’…
This is correct, there was also some crazy level of corruption and incompetence in civic planning as well; enormous housing developments would be built without the infrastructure in place to support them. I moved into a brand new, million euro apartment just outside Dublin a few years ago (I didn’t pay a million euro for it, I was renting) and the water from the taps wasn’t safe to drink. The Georgian manor house next door to the development was demolished to build another raft of luxury apartments which were still empty and under dust covers two years later when I moved out of that place.
Ireland had a lot of tax incentives for international businesses so a lot of American companies set up offices there and this attracted a lot of workers from all over the EU, this wave of immigration spiked house prices and developers built houses as fast as they could because everyone believed that the housing boom would continue indefinitely even though it was clear that supply for new housing far outstripped demand.