Although it’s been nearly nineteen years since I left my job as a research fellow at University College Dublin, I have been a frequent returnee to the Emerald Isle.
When I first arrived in Ireland in the mid 1990s, it was the beginning of the rise of the Celtic Tiger when the Irish economy expanded beyond the expectations and dreams of Irish people.
In fact, between 1995 and 2000, it grew at an average rate of 9 per cent and, whilst there was some slowdown after this, it still had an average growth of 5.9 per cent in the years up to the crash of 2008.
Not surprisingly, this success meant that Ireland was the country that many small economies, including Wales, wanted to emulate. How this growth happened is still a cause for debate amongst economists but it is probably due to a mixture of factors rather than one outstanding reason.
The first was the low level of corporation tax, which at 10 per cent, was a massive magnet for many multinationals to base their operations in Ireland. At the same time it was reducing business taxes, Ireland received billions of pounds of European Structural Funding which was invested not only to update a creaking infrastructure but, more importantly in education and skills to support the new industries being attracted to Ireland.
But none of this would have worked without a specific industrial policy that focused on developing key value-added sectors in manufacturing such as pharmaceuticals and in promoting emerging industries such as software. It also recognised the growing importance of high value services and established the International Financial Services Centre in Dublin that resulted in 14,000 new well paid jobs in finance and legal firms.
As a result, the economy boomed and tens of thousands of highly skilled young Irish people who had previously left their homeland to look for work came flooding back to be employed in highly paid jobs within these sectors.
Unfortunately, the economy shifted away from an industrial and export led growth towards a dependency on a property boom where wildly unrealistic prices were being paid for land and buildings.
And despite warnings that this was unsustainable, nearly everyone in the country was swept along by this tidal wave of prosperity.
But then came 2008 and the financial crash across the World led to the property bubble bursting and the banks began to get huge losses on the loans they had given out to speculators. This led to the Irish Government guaranteeing their liabilities using public funds which, unfortunately, only added to the ever-expanding public deficit and towards the end of 2010, Irish government debt had reached a level where the international debt market was no longer prepared to support them.
This is when the European Union and the International Monetary Fund stepped in with financial support of 85 billion euros. However, this was contingent on having stronger public finances, a better capitalised banking sector, and a strategy to restore economic competitiveness.
The austerity measures were brutal and the pain the Irish people had to suffer was considerable. Within nine months, over 10 billion euros was withdrawn from the economy through tax rises and spending cuts, leading to cuts in wages, an unemployment rate of 15 per cent and a reversal of in-migration with many young people again leaving their country to look for jobs overseas.
But was all this short term pain worth it and has this strong medicine helped to cure what was a seriously ailing economy?
The answer is that Ireland is over the worst and is back on the road to recovery. In fact, it now has the fastest growing economy in the European Union in 2014 despite fiscal contraction, tight credit and continuing household and business debt. As a result of this contraction in domestic demand, the economy has had to change its focus towards greater export activity.
Whilst exports accounted for 10 per cent of GDP in 2007, this had grown to 25 per cent of GDP by 2012, a result that was driven by those multinational companies in key sectors such as pharmaceuticals and digital industries that stayed in the country and are now growing their international trading on the back of the global recovery.
This export driven growth means that Ireland is set to have a growth of 3.5 per cent in 2015 as compared to 1.5 per cent for Germany and 1 per cent for France, something that very few would have expected seven years ago.
Therefore, Ireland’s economy has made a significant recovery since 2008. Whilst this was partly a result of severe austerity measures, the fact that it also had strong foundations including high productivity and a flexible labour market aided its recovery better than many other countries in the Eurozone.
Clearly, much remains to be done whilst the Irish economy is not yet out of the woods, but speaking to Irish entrepreneurs this week, many are optimistic about the future for their businesses. There are also positive signs for the future with tax revenues up, household spending set to grow and government debt coming down. Certainly, if this trend continues, then the signs are hopeful that Ireland is set fair for further economic growth over the next few years.