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Monday, 30 January 2012

The Celtic Tiger: what Greece, Portugal and Spain could learn from the emergence and collapse of Ireland in the nineties and zeroes.

When you look at the unemployment rates of Greece and Spain, you feel a mix of desperation and anger. On the large unemployment among workers from 25+ years and the outrageous unemployment among youngsters in both countries. Although the unemployment rates of Portugal are much better, compared to Greece and Spain, there is still massive youth unemployment in Portugal. All data is courtesy of the Eurostat database (ec.europa.eu/eurostat).

Unemployment in Portugal from 2000-2011 per age category and gender
Data courtesy of: Eurostat (ec.europa.eu/eurostat)
Click to enlarge

Unemployment in Spain  from 2000-2011 per age category and gender
Data courtesy of: Eurostat (ec.europa.eu/eurostat)
Click to enlarge

Unemployment in Greece from 2000-2011 per age category and gender
Data courtesy of: Eurostat (ec.europa.eu/eurostat)
Click to enlarge
Perhaps it is true that all three countries have vast black economies and not all officially unemployed people are in reality unemployed. Both the tourism and the food and beverage industry (two important industries in these countries) are very vulnerable to black labor, as it is virtually impossible to check out all personnel during the holiday season. Still, these unemployment figures speak volumes of labor markets that are totally messed up.

But wait… There was another European country that suffered from massive unemployment in times not very long ago. On top of that, it was an extremely poor and slightly backward country that suffered from foreign domination for a long time, only to liberate itself through a bloody war of independence.

In the nineties, this country went through a kind of make-over and changed into one of the most successful and rich countries in Europe, only to plunge downwards again in 2008. The downfall happened, because of a massive real estate bubble and a privately-held debt that was mindboggling. This country was Ireland, aka the Celtic Tiger and one of the genuine members of the PIIGS.

Maybe there can be lessons learned for the three PIIGS-countries having the hardest time, currently: Portugal, Greece and Spain. Maybe these countries could use the things that Ireland did right in their own economies and avoid what Ireland did wrong.

Let´s dive into the emergence and collapse of ´The Celtic Tiger´. The history of the Celtic Tiger is based on a Wikipedia-analysis (http://en.wikipedia.org/wiki/Celtic_Tiger). Here are a view snippets from this article, combined with my comments:

The colloquial term Celtic Tiger has been used to refer to the country itself, and to the years associated with the boom. During that time, Ireland experienced a boom in which it was transformed from one of Europe's poorer countries into one of its wealthiest. The causes of Ireland's growth are the subject of some debate, but credit has been primarily given to state-driven economic development: social partnership between employers, government and unions, increased participation in the labour force of women, decades of investment in domestic higher education; targeting of foreign direct investment; a low corporation tax rate; an English-speaking workforce, and crucial EU membership – which provided transfer payments and export access to the Single Market.

Scorecard in which the Irish Key Success Factors are investigated for
Portugal, Greece and Spain. Data based on various sources
Click to enlarge

In this scorecard, I took the scores of these PIIGS-countries on the earlier mentioned Key Success Factors for Ireland. These scores are based on data from various sources that I could find via the internet.

Portugal scores best with three Good/Moderate scores and a reasonably attractive corporate tax rate of 25%. However, the country scores quite poorly on targeting foreign direct investment, according to the Ernst & Young European Attractiveness Survey 2011, as it doesn’t belong to the top 15 of most popular countries for foreign investments.

Spain scores only moderate in most categories, but is a quite popular country for foreign investments (#5). The relatively high corporate tax and the poor knowledge of English are points that need improvement.

Greece scores generally poor in most categories, but has a low corporate tax and a workforce with moderate knowledge of English. There is ample room for improvement in this country.

None of the three countries is outstanding in any category. While Portugal has the best cards currently, all three countries could improve here to make themselves more attractive to foreign investors. Especially a good knowledge of English, substantial investments in higher education and attractive corporate tax rates could do a lot for these countries.

In the 1990s, the provision of subsidies and investment capital by Irish state organisations  encouraged high-profile companies like Dell, Intel, and Microsoft to locate in Ireland. These companies were attracted to Ireland because of its European Union membership, relatively low wages, government grants and low tax rates. Enterprise Ireland, a state agency, provides financial, technical and social support to start-up businesses.
The building of the International Financial Services Centre in Dublin led to the creation of 14,000 high-value jobs in the accounting, legal and financial management sectors.

In these trying times, there could be chances for Portugal, Spain and Greece when they can lower their wages and lower their corporate tax rates. All three countries are of course already a member of the Euro-zone.

I would make one difference to the Irish approach. Instead of attracting high-profile companies with investment and development subsidies, I would attract those companies with longterm (at least ten years) corporate tax breaks, effectively lowering the tax rates to 15-20%.

Subsidies cost a lot of money from central and local governments and when these subsidies eventually dry out, companies have less reason to stay in their host country or region.It happens quite often that companies directly start to look for other subsidized locations instead. Tax breaks on labor and corporate tax on the other hand, initially cost less money to the governments when handed out and can therefore be handed out for a long period (> 10 years). Through job creation and increased prosperity among the population, these tax breaks will pay themselves back eventually.


Irish workers can communicate effectively with Americans — especially compared to other low-wage EU nations such as Portugal and Spain. This factor was vital to U.S. companies choosing Ireland for their European headquarters.

  My Ernst´s Economy´s Top Tip for Spain, Greece and Portugal: teach all unemployed youngsters and students English and make sure they become good at it. Give also older and employed workers a chance to study English. It will be worth every penny of investment. English is the ´Lingua Franca´ of the 21st century, whether you like it or not. When these countries produce workers that speak English fluently, it will dramatically increase their chances on foreign investments.

By mid-2007 in the wake of the growing global financial crisis the Tiger had all but died. Some critics, such as David McWilliams who had been warning about impending collapse for some time concluded that: `The case is clear: an economically challenged government, perniciously influenced by the interests of the housing lobby, blew it`.


In February 2010, a report by Davy Research concluded that Ireland had "largely wasted” its years of high income during the boom, with private enterprise investing its wealth "in the wrong places", comparing Ireland's growth to other small Euro zone countries such as Finland and Belgium - noting that the physical wealth of those countries exceeds that of Ireland, because of their "vastly superior" transport infrastructure, telecommunications network and public services.

If these three PIIGS-countries succeed in attracting foreign investments and their GDP will rise eventually, they better not invest their money in ´bricks and mortar´. Instead they should invest the money in:
  • Even better education; 
  • A high-tech ICT infrastructure all over the country; 
  • Good roads, ports and waterways; 
  • Centers of excellence in the areas of agriculture, high-tech, manufacturing and services, where scientists and universities, companies and the local government are working together to create value for the future. A good example of this in The Netherlands is Brainport Eindhoven.

All these three countries experienced a kind of real estate bubble during the last fifteen years. Especially the CRE- and RRE-bubble in Spain was really huge. I hope all these countries have learned their lesson from this and avoid real estate bubbles in the future.

Conclusion:

The Irish approach certainly offers perspective for the three most challenged PIIGS countries: Portugal, Greece and Spain. All three countries have ample room for improvement where it concerns the key success factors of Ireland.

The unfortunate circumstance is that the EU, the European Central Bank (ECB) and the International Monetary Fund currently focus too much on austerity measures to achieve a reduction of state debt and state deficits. 

Austerity measures in the current circumstances will further choke the economies of these PIIGS, but can´t be avoided unfortunately. The leaders from Germany, The Netherlands, France and other Euro-zone core countries are currently looking at the PIIGS´issues ´with blinders on´, focusing solely on the financial and not on the economic issues of these countries.  Therefore they miss the reasons that these countries are lagging so much, compared to the countries in the Euro-zone core.

But this too shall pass and in a few years Greece, Spain and Portugal might have more leeway to make their own economic decisions. I wouldn´t be surprised if these countries would follow the Irish example.

And then the most important lessons from Ireland´s collapse in the years after 2000 are:
  • Invest in all kinds of infrastructure, but not in real estate
  • Avoid an elevated inflation and thus a price-wage spiral.
  • Keep the banks (national as well as international) on a short leash and make sure they don´t hand out ´kamikaze´ loans to companies and citizens in your country.
  • Keep innovation and investments in higher education and high-tech flowing. Your country should have a competitive edge at the unavoidable moment that the wages go up.


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