Effects of Joining the European Union

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Joining the EU

In 1973, Ireland made further advances to encourage free-trade and joined the European Economic Community (now known as the European Union). Not only did the EU promise open access to an enormous single market, but Ireland was finally able to break away from its historic dependency on the U.K. market [2. The immediate impact of Ireland’s membership in the EU was a boom in agriculture since Irish exports had free entry into various European markets at appealing prices. Between 1972 and 1978, real farm income increase by more than 40% and land prices skyrocketed [2. Even though farmers received benefits, foreign investment continued to create jobs, and emigration had nearly reversed, Ireland did not see the kind of economic results they expected from joining the EU. Ireland’s economic development was seemingly left unchanged.

Fiscal Crisis

From 1973 until 1986, Ireland faced severe financial crisis. The monetary complications were due to Keynesian policies [11]. For instance, after the first oil shock of 1973 and through the second oil shock of 1979, the Irish government increased its expenditure in an attempt to spur aggregate demand. This policy, however, was unsuccessful in restoring the Irish economy. The result of such expansionary policies left Ireland in an unfavorable economic situation as government deficit reached staggering figures. More specifically, Ireland’s government budget deficit averaged 12% of GDP in the first half of the 1980’s [11]. This made international investors rightly nervous. When the Irish government tried to control its spending, the situation worsened. Not only did the unemployment rate reach an all time high of 17% in 1986, but job growth throughout the same year averaged -1.3% and emigration resumed as well, peaking at 44,000 in 1989 [2]. Ireland’s poor economic conditions worried foreign investors and consequently, Ireland suffered a significant decline in foreign investments in the late 1980’s. At this time, three high-profile U.S. companies, AT&T, Black and Decker and Hyster, closed their Irish operations [2].

In an effort to reduce its budget deficit, the government increased taxes on labor and consumption in the early 1980’s. This proved to be the wrong approach as the debt-to-GDP ratio continued to increase. By 1986, accumulated debt accounted for 116% of GDP [11]. During this time, Ireland’s economic growth was as unfortunate as their fiscal situation; the country averaged 1.9% expansion of GDP per year between 1973 and 1986 [11].

In the late 1980’s Ireland was in dire need for a dramatic shift in policy. Tax increases had already failed and therefore could not be considered as a possible solution. Funding the debt through inflation was not possible either since Ireland had just reduced its rate of inflation from 19.6% in 1981 to 4.6% in 1986 [11]. The only plausible way in which the financial crisis could be eased and the budget controlled was by reducing government expenditure. This is just was the Irish government did.

In 1987:

• health expenditure received a 6% cut
• education faced a 7% cut
• agricultural spending decreased by 18%,
• spending on roads and housing fell 11%
• the military budget was cut by 7%
• public sector employment was voluntarily reduced by almost 10,000 jobs

The budget for the following year would see the biggest spending cuts Ireland had experienced in 30 years [11]. The government’s plan began to pay off when the primary deficit was eliminated in 1987 and the debt-to-GDP ratio fell steeply from its peak in 1986. By the end of 1990, the government debt was less than 100% of GDP [11]. Not only did the government’s action of reducing its expenditure help to solve the financial crisis, but it also ended up reducing the government’s role in the economy. This helped to stabilize the macroeconomic environment in Ireland. By 1989, the Irish economy started expanding at a rate of 4 percent, which is impressive compared to its growth of 1.9 percent between 1973 and 1986. Ireland’s new rate of growth in the late 80’s, however, is relatively unimpressive compared to the growth that it would come to experience during the next 13 years of the Celtic Tiger.

A Little Help from the EU

When Ireland first joined the EU in 1973, it was viewed as a weak new member of the family that expected and deserved the financial support of the EU [1. As though it were coming to aid the poor, the EU provided assistance to Ireland in the form of substantial annual structural grants. Ireland would use the financial aid to invest in much need infrastructure that previous budget constraints had prevented them from accomplishing. It is debatable, however, about how significant a role the EU’s structural funds played in aiding Ireland’s economic success. Nonetheless, Ireland took full advantage of the EU’s new role as “tax payer” [1. Ireland’s hope for its future was to serve as a platform for foreign investors. Ireland’s plan was for multinational firms to invest, locate, produce, and employ in Ireland. Ireland began to implement its plan by targeting certain industries it felt were highly desirable. Such industries included electronics, computers and pharmaceuticals. Ireland began to entice foreign investment by promoting the attractiveness of its low labor costs, English speaking labor force, access to the EU, and a relatively low rate of corporate profits tax [1. Statistical evidence [1 shows that Ireland’s plan was successful. In 1973, 67% of total industrial employment was accounted for by Irish-owned firms and the remaining 32.8% was owned by foreigners, 7.3% of which was employment in U.S. owned firms. By 1994, these figures changed drastically. Irish-owned firms now made up 56% of total employment while foreign-owned firms increased to 44%. Of that 44%, the U.S. share had increased to 23.3%. This contrasts to the U.K.’s share, which fell from 14.6% in 1973 to 5.8% in 1994. It is undeniable that U.K. investments were being replaced by U.S. investments. In two short decades, the U.S. had become one of Ireland’s largest investors and had helped to facilitate Ireland’s industrialization process. The situation was mutually beneficial as Ireland was the U.S.’s preferred choice among its other European options. The chart below shows the substantial portion of investments that the U.S. was making in Ireland relative to other countries in Europe.

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