|BUSINESSWEEK ONLINE : APRIL 10, 2000 ISSUE|
Ireland: Burning Too Bright
Can Ireland control its rapid growth?
It's one of the hottest investments in Europe. But it's not some high-flying Net stock: It's Dublin real estate, the tonier the better. The market for high-class properties in the Irish capital is smoking, with some prices doubling in the last year. John Appleby, a 38-year-old managing director at Oracle Corp. Ireland, jokes that his house in the fancy Dublin neighborhood of Ballsbridge has appreciated as much as his company's shares.
The Celtic Tiger is roaring louder than ever. Growth is clocking in at 8.7% a year. Unemployment is dropping below 5%. Its budget surplus is Europe's biggest. Ireland's technology industry recently edged out the U.S.'s to become the world's leading exporter of software.
It's all good--maybe too good. Now, European Union officials are worrying that Ireland is growing so fast it could crash. The biggest alarm: inflation, which has doubled in the last year to 4.6%, the highest rate in the EU. ''Ireland is clearly overheating,'' says Julian Callow, chief Continental Europe economist at Credit Suisse First Boston in London.
The Irish economy is fast becoming one of the trickiest issues facing European policymakers. Ireland is a tiny part of Europe's economy. But if it tumbles, it could prove a major embarrassment for the EU. For one thing, now that Ireland has entered monetary union, it no longer controls its own monetary policy: The European Central Bank dictates its interest rates and exchange rates. The ECB's tiny rate hikes, designed to promote growth in France and Germany, have done nothing to slow Ireland down: If Ireland spirals out of control, it could call into question the wisdom of the ECB's one-size-fits-all monetary policy. And critics worry that what happens in Ireland could have serious implications for other members of monetary union such as Spain, Finland, Portugal, and the Netherlands, whose fast-growing economies may eventually face a similar predicament.
EMISSARIES. There's no denying that a decade of deregulation, tax cuts, and corporate restructuring has transformed the Irish economy from a laggard to a leader. But if Ireland were to fall into a deep recession, it could dampen Europe's newfound interest in economic restructuring. Says Austin Hughes, an Irish Investment Bank economist: ''We have to make sure the economy doesn't fall victim to its own success.''
No wonder the EU is sending emissaries to warn the Irish. On a visit to Dublin in early March, Commissioner for Monetary & Economic Affairs Pedro Solbes Mira criticized the government for its inability to curb inflation. Irish Finance Minister Charlie McCreevy was furious, but Solbes had a point. The big fear is that accelerating inflation in Ireland will drive prices and wages up so much that the country's competitiveness will erode, foreign investment will slow, and the economy will become much more vulnerable to external shocks.
Ireland's open economy already makes it exceptionally sensitive to outside economic events. If the U.S. hit a recession, American companies might well pull back on Irish investment, which would hit the property and labor markets hard. Also, Ireland imports 75% of what it consumes, and most of those products come from the U.S. and Britain, says Dan McLaughlin, chief economist at ABN-Amro Stockbrokers in Dublin. Because Ireland does more trade in dollars and sterling than any other EU member, it has suffered the most from the euro's ongoing weakness.
For now, the Irish government is at a loss for what to do. With interest rates set by the ECB, a big jack-up in rates is out of the question, even though credit has expanded by 25%. ''There's no monetary policy prescription for the problems of the Irish economy,'' says Maurice O'Connell, governor of the Central Bank of Ireland. Cooling off growth through higher taxes, lower government spending, or imposing big minimums on the deposits paid for houses are all politically unpopular moves. And the Irish want to be rewarded for their industry. In the latest budget, more than $1 billion in tax cuts were announced, including tax relief for mortgages.
Containing wages will also prove increasingly difficult. After boosting employment by 50% in the past decade, Ireland now has more jobs, skilled and unskilled, than workers to fill them. The Irish government announced in the beginning of March its intention to bring 200,000 skilled immigrants into the country. FAS, the Irish training and employment agency, is planning job fairs in the U.S., Europe, and Canada to recruit skilled workers. ''Ireland is too competitive,'' says John FitzGerald, research professor at the Economic & Social Research Institute in Dublin.
STEEP HOUSING. Whatever the risks, businesses are desperate for more workers. Many Irish tech companies, once sources of cheap brainpower themselves, now outsource software development to lower-cost countries such as India. U.S. chipmaker Intel, one of Ireland's biggest employers, has billboard ads on the country's congested highways to recruit top tech talent. The Vintners Assn. is using a European employment agency to find foreigners to staff Dublin's numerous pubs. Returned Irish emigrants are shocked to find themselves unable to afford housing.
The optimists argue that the economy can still manage a soft landing. Labor productivity is very high, and the unions have recently agreed to modest wage increases through 2002. And U.S. companies like Aetna, Procter & Gamble, and Hewlett-Packard are still expanding their Irish operations.
Ordinary Irish, naturally, want the party to keep going. Says former Prime Minister Garrett FitzGerald: ''People don't understand why they should be asked to tighten their belts.'' True, but they don't want the great boom to be followed by the great bust, either.
By Kerry Capell in Dublin, with Carol Craig in Dublin and David R. Fairlamb in Frankfurt
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Ireland: Burning Too Bright
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