In just a few decades, a country burdened by poverty has transformed itself into a “Celtic Tiger”, prized by multinationals. With a GDP per capita twice that of France, Ireland is one of the few European states that now has a budget surplus. What can we learn from the choices that led to this “Irish miracle”? Dan O’Brien, chief economist at the think tank Institute of International and European Affairs, gives L’Express the recipe for local economic growth – advantageous taxation for businesses is not the only ingredient. And suggests some ideas for France, which is facing the urgent need to straighten out its public accounts.
L’Express: Ireland has managed to overcome the 2008 crisis, which led to a significant public deficit, and has been running a budget surplus for several years – excluding the Covid period. How was this recovery made possible?
Dan O’Brien : From the Great Famine of 1845-50 until the 1990s, Ireland was one of the worst performing economies in north-west Europe. To reverse this trend, we implemented a model in the 1960s and 1970s that focused on attracting foreign investment, which began to bear fruit in the 1990s, during the first wave of globalisation.
In 2008, the banking crisis led to the bankruptcy of our government, a situation similar to that experienced by Greece and Portugal. But what has distinguished us is our ability to maintain foreign investment. These multinationals, which represent a large part of our exports, generate jobs and pay billions of euros in taxes. They are the real engine of our economy.
An attractive tax system is obviously a key factor in attracting these investments, but it is not the only reason for our success. Take for example our pharmaceutical industry, its efficiency is not only based on tax advantages; it also stems from our qualified human resources and the skills developed over decades. In short, it is a clever mix of advantageous tax policy, a solid industrial reputation, human skills, political and regulatory stability.
How does Ireland manage its surplus? By increasing social spending or is some of it set aside?
Ireland’s fiscal position is generally positive, but it could be even better. It is important to remember that small countries, such as ours, are often subject to more volatile activity. Economic growth has allowed us to increase public funding for essential sectors such as health and education. More recently, the State has even started to save: we have set up a sovereign wealth fund, in anticipation of future challenges, such as the ageing of the population and the ecological transition.
However, our health system is not performing as well as it should be, and needs reform. We operate with a hybrid health system: a largely free National Health Service (NHS), but with half the population having private health insurance. Despite public spending per capita being among the highest in the world, health outcomes remain only slightly above the OECD average.
Can France learn from Ireland’s budgetary success?
I think your country has always underestimated the strength of its own economy. It is important to distinguish between France, a large G7 economy, and a small economy like Ireland. France attracts foreign investment – more than Italy or Germany – but it will never be as dependent on it as Ireland, and I do not think it wants to be. So the lessons that France can learn from the Irish model are limited.
What is surprising is that your public spending is the highest in the world in relation to GDP, and yet, every time I talk to the French, they seem very unhappy! If a very interventionist state made people happy, France would be the happiest country in the world. So increasing public spending does not seem to be the solution to France’s problems.
The French budgetary situation is very dangerous. Since June, the spread [NDLR : écart de taux] with German bonds seems to increase structurally, which costs more money to finance the debt. I fear that France, in terms of political system and budget, will become another Italy, even if its economy is stronger and more international.
What mistakes do you think led to the current collapse?
In the 1950s and 1960s, it was rare to see a European country with a large public deficit. Then the political culture changed in the Western world in the 1970s and 1980s and France, like others, increased its public spending. The problem is that it did not take advantage of the periods of expansion to contain them.
When an economy is taxed at a level as high as France’s, it has a disincentive to growth. Of course, it is good that the state plays an effective role in education and health, but it has gone too far on taxation. It must now show the financial markets that it takes the management of its public finances seriously, both in the short and long term.
A new Minister of Economy is to be appointed soon. What reforms should he focus on?
Taxing work is a disaster. Increasing the tax burden on businesses is a very bad idea. The best levers are reducing social security contributions and income tax. The goal is to reduce the factors that discourage people from working, because France’s employment rate is among the lowest in the OECD.
Second, pension reform is difficult to implement, regardless of the country. The best method in this area is “salami-slicing”: implementing small reforms every five years as people age, which encourages them to extend their working lives. This is a trend that we are already seeing: people are staying in the labour market longer, not only because of pension reforms, but also because they are healthier and live longer than before.
The European Commission has launched proceedings against France for “excessive deficit”If this situation continues, what impact could it have on the rest of Europe?
It is essential that the eurozone has rules that everyone, large and small, respects. I think it is important that the European Commission has initiated an excessive deficit procedure against France because it has broken these rules. This external pressure can also help governments to justify their reforms to their populations.
Before the 2008 crisis, the European Commission did not do enough to control public finances. Today, France should listen to Brussels. Member states have a responsibility towards each other: if we do not all respect the rules, a new crisis could occur.
.