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News : Irish Economy Last Updated: Nov 8, 2010 - 3:59:48 AM

Ireland: Barometers of stress rise as reality and fantasy compete in economic discourse
By Michael Hennigan, Founder and Editor of Finfacts
Nov 5, 2010 - 7:39:10 AM

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Ireland is facing rising barometers of stress at this time of crisis, as reality and fantasy continue to compete in economic discourse.

On Thursday, the Government announced planned adjustments of €6bn in the December budget and it leaked to journalists that the €15bn four-year plan to bring the budget deficit down to 3% in 2014, will not be available until days before the Budget on December 7th.

A High Court mandated by-election later this month increases the likelihood of a general election while pressure keeps mounting on international markets.

Europe's biggest clearing house may set a 15% cash deposit margin  on Irish bond daily trading and on Thursday, the Irish 10-year bond yield rose to a new record high of 7.62%.  

The long addiction to spin among policy-makers in Ireland and its contagion to many others, results in confusing signals.

There is an official story line of assurance for international markets but this line can be counterproductive to realistically addressing the challenge at home to succeed in building a sustainable recovery that will significantly cut unemployment.

On Thursday, we provided data on how exports grew by more than 50% in nominal terms in the past decade but no net jobs were added in both the foreign-owned or indigenous exporting sectors.  

Nevertheless, rising exports which multinational firms are overwhelmingly responsible for, are unquestionably seen as an engine of growth. 

Danny McCoy, chief executive of the Irish Business and Employers’ Confederation (IBEC), said in the Financial Times in September, the real challenge for the Government was to get consumers spending again.

“Households have the money but they’re spooked by the scale of the budget cuts and the bank costs. My objection to increasing that €3bn figure [Budget fiscal adjustment] is what that will be signalling to consumers. It will encourage more precautionary savings, and will therefore be counterproductive,” he said.

Now the adjustment is €6bn and the former ESRI economist told an IBEC CEO conference this week that output per Irish worker grew by about 12% in 2009 and 16% in 2010.

The bad news about this good news is that the pharmaceutical/medical devices sectors, which are responsible for more than 50% of merchandise exports, saw exports surge in recent years without adding any employees. Some of the firms in fact cut jobs.

McCoy said Irish households remain among the wealthiest in the European Union, which should support the case for a non-cyclical property tax.

An IBEC report on productivity said the EU Commission estimates that over the 2008 to 2011 period Irish unit labour costs will have fallen by close to 10%. This is in stark contrast to experience elsewhere in the EU and most of our competitor countries will continue to see rising unit labour costs. However, unit labour costs are not actual labour costs and are related to output. The average reduction in Irish pay rates in 2010 is expected to be 1%.

Again, this isn't the full story in showing Ireland related to other countries because of stimulus measures during the recession.

For example, Germany saw unit labour costs rise during the recession because it had up to 1.5m workers in the Kurzarbeit part-time work scheme and the government subsidised their pay.

McCoy told his conference that 15 of the top 25 global medical technology firms are located in Ireland; 8 of the top 10 in pharma; and over half of the world s leading financial services companies have a foothold in Ireland.

"However, what we see is the extent to which Irish-owned assets are working for us overseas and creating that €50bn in wealth that flows back into Ireland.

Ireland s stock of direct investment overseas (ODI) in other words, Irish owned assets abroad was just shy of 190bn. The stock of FDI assets here in Ireland was just below 170bn.

Ireland therefore has a net Direct Investment asset position of 20bn.

This number shows the growing impact of large Irish multinationals many of them represented here today operating in the international sphere: companies like CRH, Smurfit Kappa Group, Glen Dimplex, Kerry Group, Glanbia, Paddy Power, Creganna-Tactx and Greencore indigenous companies growing their international reach and acquiring new businesses overseas."

The argument here is that Ireland continues to attract substantial foreign direct investment but outward investment by Irish companies more than matches FDI (foreign direct investment), giving an international footprint to Irish business.

Because of the existing large stock of FDI in Ireland, investment in facilities is still significant. However, the success in attracting most of the big-name American firms has resulted in a big fall-off in new significant greenfield investments.

As for the impressive story on €50bn flowing in from Irish assets overseas, the reality is a little different. In fact little may have actually flowed back to Ireland.

CRH is the tremendously successful international materials group which was formed through a merger in 1970 of two leading Irish public companies, Cement Limited (established in 1936) and Roadstone Limited (1949). CRH accounts for about one third of market capitalisation on the Irish Stock Exchange and up to 90% of CRH's shares are held outside Ireland.

The Irish operation accounted for about 1,600 of 80,000 employees in Dec 2009, down from 94,000 in Dec 2008.

In Ireland, CRH had a corporate tax refund of €5m in 2009.

In practical terms, CRH is an international company which raises most of its finance overseas and that is where most of it remains. In contrast, Nokia has about 30% of its payroll in Finland; it has spawned a large number of tech startups and has most of its R&D in its homebase.  

Smurfit Kappa Group has little presence in Ireland now, while the other cited examples have.

What is key is home value-added.

A Cork Chamber of Commerce conference held in Cork yesterday, was told that according to the IDA’s Annual Report 2009 out of almost 1,000 IDA supported companies operating in Ireland, 15 were from the Asia Pacific region outside of Japan.

The issues that Danny McCoy did not speak about were the lack of a serious appetite to reform the public sector and the protected private sector.

It's easy to find impressive productivity statistics in the industrial sector.

In recent weeks, it was announced that Trintech, the last of the home-grown high-tech hopes of the 1990's, had been sold to a US firm.

Finfacts said it was a development that was likely ignored by policy-makers hell-bent on realising dreams of creating a European Silicon Valley in Ireland and funding the fairytale aspiration that large-scale funding of university research would be the solution to mass unemployment.

Promoters have this year cashed-out on two university spin-outs which had developed technologies, which had caught the attention of American firms.

Again, there was hardly a ripple.

Finfacts has often highlighted the changing model of globalization.

A HSBC Bank report, which was published last summer says investment in education and R&D is transforming Asia’s skills base. The model where the West did the development work and the East took care of low value production is dead. In future, forward looking businesses will take advantage of the growing skills of Asian workers.

Asian economies are a major global source of skilled workers not only in sectors such as engineering, technology, nanotechnology and sciences but also in those such as ICT services and consultancy. The most obvious example is probably India. Its leviathan Tata Group spans steel, cars and information technology. Tata Consultancy Services, a multi-billion dollar enterprise based in Mumbai, employs around 160,000 IT consultants in 42 countries. Wipro Technologies and Infosys, both headquartered in Bangalore, home to India’s “Silicon Valley” are also world names in ICT services, together employing more than 220,000. Delhi’s HCL, meanwhile, one of India’s original “garage” start-ups, is giving all three a run for their money.

Ireland needs to move beyond comfort food spin and fairytales; implement significant structural reform and open its eyes to the challenges that will otherwise engulf it. 

Looking East: The Changing Face of World Business (pdf)

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