Did Irish Austerity Really Lead to an Increase in Competitiveness?

July 8th, 2016
in eurozone and euro, macroeconomics

by Philip Pilkington

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.

Follow up:

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.


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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