Part of Ireland’s prosperity rests on its attractiveness as a foreign direct investment hub. Ireland’s big idea since the 1950s has been to get other people’s money here and turn that money into good jobs for Irish people. The two vehicles for the money-getting (at which we are honestly world-class) are the IDA and our multinational-friendly tax and regulation system.
It’s not a hard sell. We save companies a fortune while giving them access to one of the world’s largest markets and giving their executives a nice place to live.
Our competitor countries complain constantly that our success (which implies their failure) is because of our lax attitude to the activities of some of the multinationals located here. While this is changing rapidly, the perception remains, and our colleagues in Europe do seem somewhat bitter about it.
One of Enda Kenny’s first foreign engagements as Taoiseach saw him get stuck into French president Nicolas Sarkozy defending Ireland’s 12.5 per cent corporation tax rate. When they came, the troika wanted the totem of Irish industrial policy taken away. Kenny was having none of it.
A large part of the Irish response to Brexit has been to get financial firms to locate in Ireland, in particular insurance and financial services companies, rather than big banks. This is a modern version of the idea from the 1950s – get the foreign money to come here.
There are a few problems with this strategy. First, everyone else is doing it. These companies pay a lot of tax, generate lots of new high-paying jobs, and create positive spillovers into other firms. Many countries want them to decide to locate in their economies and so competition is fierce.
Second, these companies are not selling books or manufacturing T-shirts. They create and manage complex financial products, and enjoy the implicit guarantee of the state if things go really wrong. This creates a contingent liability on the state’s balance sheet. If the state is not able to regulate them effectively, the taxpayer might end up on the hook for their losses.
Readers may or may not remember Depfa bank. This bank was located and regulated in Ireland and was a provider of public sector finance. Depfa was bought in 2007 by German Hypo Real Estate for around €5.7 billion, moving responsibility for its regulation from Ireland to Germany. This piece of good fortune should have its own feast day in Ireland, because were Depfa on the books of the Irish regulator when the fit hit the shan in 2008, the Irish taxpayer may have been liable for its losses.
We should compete for business, but be honourable about it
This was a pretty unique situation, but given the Irish state’s proclivity to socialise the losses of large financial institutions (PMPA, ICI, Quinn Insurance, Anglo Irish Bank, EBS, Irish Nationwide, Allied Irish Banks, Bank of Ireland, Permanent TSB, and more), I’d take the Pepsi challenge that the Irish taxpayer would have taken a hit on Depfa in 2008.
Regardless of the could/would/should, Depfa lost a fortune as the financial crisis hit and, less than 12 months after they bought it off the Irish, Hypo Real Estate needed around €10 billion from the German government, not the Irish one, which again to be fair had to spend tens of billions on its own banks and insurance companies.
Take a more recent example. Post-Brexit, we have been chasing banks such as HSBC to get it to locate here. HSBC is a bank that helped terrorists and drug cartels launder money, that massively evaded taxes in Switzerland and Mexico, that was found to be engaged in the manipulation of the key Libor interest rate, in Eurobor manipulation, in mis-selling mortgages to Fannie Mae and Freddie Mac in the US, and other offences it settled for hundreds of millions of pounds with regulators.
HSBC decided to send 1,000 jobs to France, and not Dublin. Do we really want firms like that headquartered here?
The upshot of all this is that the firms we are trying to bring to Ireland bring risk with them. We know they can manage risk in ordinary times, but we don’t live in ordinary times, and tiny open economies like ours are extremely sensitive to changes in international conditions.
As we have since the 1950s, our small economy is also using its tax and regulation system as a draw to bring these firms to Ireland. Minister Eoghan Murphy recently complained to the European Commission that it is being undercut by countries using their tax and regulation system as a draw.
He accused countries like Luxembourg of ‘creeping regulatory arbitrage’, which Ireland has specialised in for decades. Minister Murphy is a good man, and trying hard to create jobs for his country. But here he hasn’t a leg to stand on thanks to 60 years of Irish industrial policy.
Very worryingly, Murphy said of the large firms being courted that “they are offering a back door to the single market, without the requirement to have capital to back up their entities in the European Union”. Without sufficient capital to absorb losses, when the bad times come, these entities are in deep trouble. Or more accurately, the countries they locate in are in trouble.
Perhaps Ireland’s competitor countries are engaged in these dirty tricks, and if so the people of Luxembourg are going to be the losers if these firms blow up, not the people of Ireland.
We want to win in the competition for business from abroad, and I support that, if we have a solid plan so we can manage the risks they bring. We don’t want to win competitions in hypocrisy.