# ireland and the euro



## joe sod (18 Feb 2005)

just wondering what people think. Will ireland be able to stay with the euro in the years to come. There is clearly big strains between growth in the irish economy and growth in the EU. Can the euro really hold this together. Clearly ireland needs much higher interest rates to cool down the economy the same as in britain. The bank of england has taken the steam out of their housing market and it looks like they will achieve a "soft landing". There is clearly a need for ireland to have control over its own interest rates the central bank has been reduced to a talking shop. Also in the future hard choices will have to be made with regard to taxation. I believe that the EU will demand tax harmonisation for all member countries. Our low corporation tax is the bedrock of our economy it is the reason why american multinationals have their european operations here, Im certain they would leave if we were forced to raise it


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## sherman (18 Feb 2005)

Well, taking your first point re 'strains' between growth here and growth in mainland Europe. This is no big issue, it happens all the time in large currency areas - e.g. in the US New York, California boom, while the rust belt states suffer. This doesn't lead to anyone claiming NY or Cali should leave the Union. Same thing in the UK - South East booms, scotland, wales etc. bust has been the pattern of the last 10 years. 

(Although there is an argument that in particular the US labour market is far more flexible i.e. if no jobs in Arkansas, people will move their families to Cali or New Jersey etc. far more easily and readily than Germans will move their families to Dublin).

On tax harmonisation, the EU (read France and Germany) have been demanding tax harmonisation for some time. However, Ireland and Britain have consistently blocked attempts to even get this to the table. Now that the 10 accession countries are in, the 'states rights' countries have only become more powerful, not less. Therefore tax harmonisation is even further down the road than before. Tax competition is rife, and works extremely well, amongst states in the US.

Secondly, our economy is not solely dependent on building Dell boxes in Bray - our financial services industry is easily as big an employer (and arguably a better employer ie higher wages, better prospects) as manufacturing for US multinationals. Ironically, whereas the much promised high-end R&D jobs have for the most part failed to materialise in software, pharma etc., the Irish financial services sector is starting to aggressively move into 'front office' financial products, and is seriously threatening Luxembourg for instance in value-added funds etc. Also, don't forget agriculture is still a huge industry, dwarfing US multinationals in the numbers it employs, etc. etc.

Also, where would the US multinationals go? If the whole of Europe moves in tandem, where's the advantage in going somewhere else in Europe? History has shown that labour costs in 'cheap labour' economies rise fast once the economy's wealth increases. What if they move to Turkey/North Africa? Hardly likely - language barriers, lack of sufficient numbers of skilled operatives etc. 

If Dell, MSFT, etc. want to benefit from EU trade agreements etc. they'll continue to locate here, where we have the most flexible labour laws in the eurozone, as well as the only native English-speaking workforce.


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## joe sod (19 Feb 2005)

you made a number of good points about different tax rates in the US and about the US dollar being able to hold all this together. However you said yourself that there is tax competition between different states in the US which means that if one state thinks that it is loosing out too much to another it will reduce its tax rates. Clearly this is not happening in Europe, Ireland has a dramatically reduced tax rate with regard to continental europe which means it gets a disproportionate amount of investment in comparison to continental europe. 
Now that eastern european countries have also being reducing their tax rates it means that either europe will demand tax harmonisation or they will also reduce their tax rates. In both cases Irelands attractiveness will be reduced. I believe that our native english speaking population is a big attraction to US multinationals, however I don't think you need a huge amount of native english for "building Dell boxes in Bray". 
I also believe that US multinationals are big users of irish financial services indeed many are directly employed by US multinationals. This is because of transfer pricing where they artificially boost the revenue they earn in ireland by buying in components and in many cases finished products from third countries to avail of the low corporation tax here. So US multinationals have a huge effect on the irish economy even though maybe only 10% of the workforce is directly on their payroll.


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## sluice44 (20 Feb 2005)

Hi Sherman,
I'm not in the industry but your comment intrigued me.  Can you expand a little or post a few links.....


> ...the Irish financial services sector is starting to aggressively move into 'front office' financial products, and is seriously threatening Luxembourg for instance in value-added funds etc.



--What's are 'front office' financial products?  What are 'value-added' funds'?
--Two groups of pan-european stock exchanges are trying to buy the London stock exchange (I think).  Assuming one of them wins, will this affect your thinking?  Or am I in a different ballgame altogether!


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## sherman (21 Feb 2005)

Hi Sluice,

I haven't got any links etc, its more anecdotal evidence from friends, colleagues etc. who work in the IFSC. I know a good number of former colleagues who have come back from London to run loan books for large banks. These banks wouldn't have dreamed of doing the front office trading, syndication etc. of these loans anywhere but London even 10yrs ago, but a number of top-tier banks are now moving parts of their loan origination teams over here - the people who actually go out and bring in the business.

I have a couple of friends who work in funds listing, and according to them Dublin is overtaking Luxembourg as the market of choice for funds listing due to lower costs and a more flexible regulatory regime. 

A lot of the banks in the IFSC are now proprietary trading large volumes of currencies, commodities, and debt daily - again, this was London's preserve until a few years ago. 

Also, some top banks are now establishing M&A and other corporate finance departments here. These departments are involved in the 'high-end' banking, e.g. I believe JP Morgan's Dublin team is advising Malcolm Glazer in his bid for Man Utd., rather than its London team.

I don't think the takeover of the LSE is good news for the ISEQ, which is mickey mouse anyway, although I have no idea in what way it will affect it - the Irish Stock Exchange should really set up a pan-European equivalent of Nasdaq or AIM, and target small/fast growing tech and other companies. As it is, the two big banks and Elan account for far too much of the value of the ISEQ

We won't challenge London's supremacy in finance anytime soon, but I reckon Frankfurt should be getting a bit worried, given the high costs and inflexible labour market over there...


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