On Friday of last week, Dan Mitchell of the Heritage Foundation, posted a short piece about Ireland. He rightly lambasts a union official who is complaining that Ireland is engaged in a race for the lowest corporation tax. It is the low taxes, Dr Mitchell points out that has given Ireland a high growth, low unemployment economy.
“When Ireland was a high-tax nation, it suffered from 15 percent unemployment and endured some of the lowest living standards in the European Union. Since slashing tax rates and reducing the burden of government, Ireland has enjoyed a remarkable turnaround. The "Sick Man of Europe" is now the "Celtic Tiger," unemployment has plummeted to 5 percent, and Ireland is now the second-richest economy in Europe.”I am, as it happens, a great admirer of Dan Mitchell’s cogent and hard-hitting writings. But I beg to differ about Ireland. In the first place, membership of the euro has fuelled inflation in the country and unemployment is beginning to climb. In other words, tax rates are very important but not the whole picture.
And speaking of the whole picture, it is worth looking at the EU as a whole as well as a sum of its members. The whole believes in redistribution of income between member states and regions. Ireland has been a benficiary of that. It is easy to argue that the country’s economic success was not due to the subsidies but to the tax cuts and some (not too much, since they are no more in control of it, than Britain is) reduction of regulation. However, the reason tax cuts and welfare reforms remain off the agenda for most governments is because hard political decisions need to be taken.
The experience of the last few months in Germany and France would indicate that any reforming government has to fight through a great deal of popular opposition. The French government has effectively caved in, Chancellor Schröder is still fighting on. But it is not easy. Whereas the Irish government did not face those problems. The EU has continuously poured money into the country and no real reform, with possible short term pain, was required.
Given the Irish “success” one would expect the subsidies to disappear. But at the first mention of such a development the Irish government sets up a wail rivalling that of the Spanish (also, supposedly a success story). This reminds me of the arguments put up by farming organizations in this country whenever there is talk of the so-called CAP reform. “You cannot cut subsidies and penalize the most efficient farming economy in Europe.” Excuse me, but I have always thought that efficiency meant no subsidy.
At present, the German economy is in severe doldrums, partly because of its own immobility, partly because of the expense of the reunification and partly because of the amount that country has to pay into the bottomless coffers of the EU. Ireland, on the other hand, is deemed to be a success, a “tiger” (even if that tiger requires a great deal of European lettuce). Why is the struggling economy subsidizing the successful one, instead of being allowed to concentrate on its problems? Some German politicians and economists are beginning to ask that question. I suspect more and more will do so, as time goes on.
Ireland can still be a successful economy (though probably not within the eurozone) but the government will have to think a little harder and boast a little less.