Ireland's innovative bond exchange
The Celtic tiger is a good nickname for Ireland's economy which continues to roar ahead. Unfortunately, like the tiger economies of south-east Asia, rapid growth rates can bring troubles in their wake. Ireland - which has had almost double-digit GDP growth for each of the last five years - now has to try to curb incipient inflation.
The trouble for Ireland is that interest rates are set elsewhere and the present euro zone rate at 3% is too low. Maurice O'Connell, governor of the Central Bank of Ireland, admits that with rates set by the European Central Bank, his hands are tied. "The Irish economy is at a very different stage of the cycle to everyone else in Emu. So, what may be good for the euro zone as a whole may not necessarily be to Ireland's advantage," he says.
"It will take some time to see the advantages of Emu. But if you're trying to manage the exchange rate of a small country with conflicting forces, such as sterling on the one side and the euro zone bloc on the other, it's a difficult world that we live in."
Colin Hunt, chief economist at Dublin stockbroker Goodbody, agrees: "By the stand- ards of conventional economic analysis, Ireland's monetary policy is extremely stimulative and extremely inappropriate. It's right for the euro-zone economy but not for Ireland."
With inflation running a little over 1%, there are unlikely to be any major policy panics for the moment. Instead attention is focused on how the country can best exploit membership of the euro block.
"We are now part of a major international currency and that brings a certain stability and security to a small country," says O'Connell. "One of the reasons for our success has been our ability to attract multinational industries. They are happier that we are inside the euro area than outside."
There are at least four components to Ireland's attraction to multinational companies: labour, tax levels, macro-economic management, and infrastructure. The country's large pool of educated English-speakers is clearly a primary resource. The priority given by the country to education over many years is reaping its reward.
But there is also the low tax environment. According to Hunt, "the low corporation tax has allowed us to attract the most profitable industries of the world, it's a boon because if you're an extremely profitable industry, you want to go to the location with the lowest corporation tax rate."
Low corporation taxes are not the whole story says David Duffy, an economist at the Economic and Social Research Institute, an independent think-tank: "We've had low corporation tax rates since the 1970s but, unlike before, we can now guarantee economic performance, economic stability and good prudent policy management."
A policy of privatization is at the centre of government strategy for economic stability. This recently culminated in the successful sale of the telecommunications company, Telecom Eirann, for I£3 billion ($3.9 billion).
The sales of two state banks, Industrial Credit Corporation and Agricultural Credit Corporation, should be next to the market. Aer Lingus, the national airline, is also a candidate for privatization.
The privatization policy has helped boost the Irish equity market whose largest companies -- Telecom Eirann, AIB, Bank of Ireland, CRH and Kerry Group -- are now finding their way onto European fund managers' lists of prospective investments.
However, Ireland's many listed medium-size concerns may be paying the price for the global investment shift into bigger capitalization stocks. The recent decision by the paper, printing and packaging company Clondalkin, capitalized at some €500 million ($521million), to go private through a management buy-out suggests that even the more substantial second-tier businesses are losing out in the equity markets.
Ireland's developing infrastructure has been a key factor in changing perceptions about the Irish economy. EU structural funds have been directed into building ports and roads to expand the country's export facilities.
"The single market is helping us build our infrastructure as well as create a manufacturing base," says Phil Sykes, a director of corporate finance at Allied Irish Banks. "These factors allow us to be in the position where Ireland appears on the radar screen of companies which are considering investing." Foreign direct investment will have to work harder when Ireland's claim to EU structural funds is challenged by the enlarged union's newer and poorer members.
Evidence that Ireland's infrastructure is struggling to cope with the rate of growth is provided by its residential property shortage. House prices in Dublin's sought-after eastern corridor have risen by more than a third each year for the last three years giving rise to fears of a market crash.
However, Duffy is sanguine about the sector: "Everybody you talk to knows of somebody who has borrowed a ferocious amount of money. But analysis from different institutions suggests that their loan-to-value ratio has fallen as the value of houses has gone higher, while the level of loans on their books has remained stable. So this would seem to suggest that they are not over-lending. However, it's still something that needs to be watched."
Ireland is likely to remain Europe's miracle economy for the next few years, although some of the euphoria may have been dampened by a recent report from the OECD. This concluded that the present 9% growth rate was unsustainable and the country's GDP will grow by no more than 5% to 6% over the next year. Some analysts have also predicted a near doubling of inflation to 2.2%. *