Ireland, the country that skews Europe’s statistics

The answer does not lie in the size of the country, but rather in how a significant portion of global economic activity is recorded within its borders. Ireland has become a global operations hub for some of the world’s largest multinationals, particularly in pharmaceuticals, technology, intellectual property and aircraft leasing. In other words, a small number of firms conducting high-volume operations cause the national accounting data to behave differently from those of a typical economy.

Ireland was already an attractive European platform for multinationals before 2015, thanks to a combination of a low corporate tax rate, a favourable legal environment, and a particularly appealing regime for the location of intangible assets (patents, software, trademarks or exploitation rights). However, 2015 marked a turning point.

On one hand, the tightening of the international framework against certain «tax engineering» strategies led many multinationals to reorganise the location of their intangible assets and some of their corporate operations. On the other hand, the Irish tax regime allowed for the fiscal amortisation of intangible assets under particularly favourable conditions. The result was that Ireland emerged bolstered as a destination for intangible assets and certain functions of many companies, particularly in the technology and pharmaceutical sectors, as it offered a stable institutional environment, legal certainty and full access to Europe’s single market. And therein lies the key to Ireland’s uniqueness: in a small economy, the relocation of high-value assets can significantly alter its investment, export, value-added and GDP statistics.

These practices explain the significant fluctuations in Ireland’s gross fixed capital formation (GFCF), exports and value added. They also explain the significant role of intangible assets within Irish investment: in recent years, it accounts for over 50% of all GFCF in Ireland, more than double the level in the main euro area economies. Ireland’s overexposure to these assets is confirmed by the fact that, since 2015, Ireland’s share of euro area GDP has been less than 4.0% on average, yet it accounts for more than 10% of the region’s investment in intangible assets. The contribution of other major economies to the euro area’s investment in intangible assets is much more consistent with the size of their economies.

The influence of multinationals and intangible assets has made Ireland a significant player in the euro area’s aggregate statistics. So much so that, in some quarters, we must ask ourselves which part of the euro area’s economic performance is due to the cyclical behaviour of the major economies and which part reflects the impact of operations concentrated in Ireland. This distinction is significant enough for the ECB itself to include in its forecast table a calculation of euro area GDP based on Ireland’s GDP and another based on MFDD.

Ireland does not distort the statistics because it has a major share of the euro area economy; it distorts them because it is the country in which a significant portion of the global intangible economy is recorded. GDP remains an essential variable for analysing an economy, but the case of Ireland reminds us that sometimes we need to look beyond the headline in order to understand this economy’s progress, as well as to gauge that of the euro area more reliably.