DUBLIN – Ireland is consistently in the world’s top 10 for gross domestic product (GDP) per citizen, but its real wealth is modest in European terms, according to Analysis by the former Governor of the Central Bank of Ireland.

Patrick Honohan – who was appointed to the Central Bank in 2009 as Ireland’s nationalized retail banks collapsed and the state risked insolvency – knows a thing or two about the forces and forces. vulnerabilities of Ireland’s exceptionally open economy.

Ten years ago he famous announcement on live radio that Ireland would immediately need a massive bailout from Europe and the International Monetary Fund. The government denied this – then, within days, negotiated € 67.5 billion in emergency loans. Ireland recovered remarkably quickly from this humiliation and repay debts early.

Now, as Ireland achieves leading GDP growth in Europe against a coronavirus tide of 25 percent unemployment and one retail closure, Honohan wonders again how domestic this really is.

In his new article published by the Central Bank, titled “Is Ireland Really the Most Prosperous Country in Europe? – Honohan offers a emphatic “no”.

He asks the question because GDP, the most commonly used measure of economic output, still puts Ireland far ahead. European peers.

“If we ignore the small city-state of Luxembourg, Ireland has the highest GDP per capita, even adjusted for differences in price levels,” Honohan wrote.

“Ireland is a prosperous country, but not as prosperous as is often thought due to the inappropriate use of misleading, albeit conventional, statistics,” he said. “Using GDP as a measure can mislead the analysis of issues such as debt, carbon intensity and inequality. “

Ireland’s GDP is mainly distorted by the presence of more than 1,500 multinationals, including most of the world’s largest tech and pharmaceutical companies. Ireland is also the world’s leading hub for aircraft rental.

Foreign companies employed more than a tenth of the Irish workforce ahead of COVID-19 and, with the boom in pharmaceutical and tech exports amid the crisis, provide pandemic-proof jobs and record tax payments.

Yet a handful of these multinationals are so large that when they exploit Ireland’s weak fiscal environment with accounting metrics, the country’s GDP numbers can be pushed to a breaking point.

This first happened in 2015, when Ireland recorded a gravity-defying 26% GDP gain, the highest ever in post-war Europe. Nobel laureate economist Paul Krugman nicknamed him “Pixie economy”.

Eventually, it became clear that much of that 2015 gain reflected Apple’s decision that year to move its IP assets to an Irish domicile. the IMF calculated in 2018 that a quarter of Ireland’s GDP growth could be attributed to global iPhone sales, with other Apple units paying the Irish unit to use its IP.

Honohan said the “biggest distortions” in GDP occur when these global companies transfer their fixed assets, such as technology patents and aircraft fleets, to Ireland. These measures similarly inflate gross national income (GNI), a rival measure of GDP that attempts to eliminate the distorting activities of multinationals but mostly fails in the case of Ireland.

“It’s not that acquiring these assets abroad contributes to GDP; it is not. But once acquired, depreciation should be included in GDP and GNI, because depreciation is exactly what G (for gross) means, ”Honohan explained.

The other way multinationals are giving Ireland inflated GDP is by moving their global headquarters to the country, as scores have done over the past decade, especially US drug companies before that. the loophole was closed in 2016. Global retained earnings of these companies inflate Irish GDP and GNI.

State statisticians, embarrassed by the label “sprite economy”, have developed since 2016 a new custom index to eliminate the overwhelming influence of multinationals in the calculations. Called “GNI Star” and written RNB *, it shows that Ireland’s underlying economic activity is around 40% lower than the overall GDP figures.

“Ireland isn’t even in the top quarter of EU countries when the comparison is made this way,” Honohan wrote.

He argues that traditional GDP also ignores the unusually high cost of living in Ireland, which is 25% higher than EU standards.

Taking into account the relatively low purchasing power of Irish households in their expensive economy, he finds that Ireland’s true per capita wealth – as measured by an index used internationally called Real Individual Consumption – drops to only 95% of the EU average.

Using GNI * and adjusting Irish prices higher, Honohan finds that Ireland comes only 12^e in the prosperity of the EU. Its per capita economic activity is behind the United Kingdom, the Nordic countries, Austria, Belgium, France, Germany, Italy, the Netherlands and, as always, Luxembourg.

Ireland’s “top notch ranking is clearly misleading,” he wrote.

Its inflated GDP benefits the country by supporting low borrowing costs, as rating agencies assess default risk, in part, by citing a country’s debt-to-GDP ratio – and the higher the GDP, the higher the debt can be financed without a market. hardly.

The Irish Treasury has been able in recent years to refinance much of its national debt at record rates. Despite borrowing over € 20 billion to support laid-off workers and businesses shut down by the pandemic, Ireland’s debt-to-GDP ratio is set to stay this year well below 70 percent, better than that of Germany.

Ireland’s oversized economic output is giving a boost. The European Commission uses each country’s GNI to calculate their contributions to the EU coffers. This means that Ireland, a net contributor since 2013, is now doing second per capita payments to the EU budget.

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