Why is the Irish economy growing faster than any country in Europe and why has that been the case for almost a quarter of a century? I thought about this question as I strolled around the Museum of the City of New York in Spanish Harlem this week. If you are in New York and interested in American economic history, a quick subway ride uptown on the Lexington Line to 103rd Street is well worth the trip.
The museum captures the story of the people who make this extraordinary city tick. The impetus that drives NYC is the same force that propels America. That force is personal ambition and a willingness to innovate in a society that rewards and confers dignity on those who take a risk, one that doesn’t stigmatise commercial failure and one that doesn’t sneer at effort.
When we look at economic history, we see that in great cities that expand and innovate – be it 17th-century Holland or 15th-century Florence – the public mood is critical. It is not the absolute number of innovators and risk-takers that is important, but the attitude of the others towards these people that really counts. America is a country that encourages.
Over the past 25 years, Europe has faltered while America has surged forward. By hitching its wagon to the United States, Ireland has been dragged upwards by America’s dynamism. In contrast, Europe has lost its mojo. Add to that the serious decline of the UK, and we have a strange situation where Ireland’s immediate financial neighbourhood is made up of faltering economies, collapsing investment, low productivity and falling revenue.
Geography usually dominates economics and, because we trade together, countries rarely deviate from their close neighbours. But Ireland has decoupled from the region by virtue of industrial policy. Despite 3,000 miles of ocean between us, explicitly favouring American multinational investment over three decades has conjoined Ireland to America.
The upshot of this is that Ireland has benefited commercially from American commerce with a huge increase in public spending, financed (in part) by corporate taxes. We have also benefited societally. This broadly-based upturn is most obviously captured in the country moving from 29th on the UN Development Index in 1992 to fifth place today. No other country in the world has seen such an improvement.
The contrast between the EU’s economic performance and that of the United States over those three decades has been spectacular and unambiguous. Even in the shorter term the US has shown the EU a clean pair of heels. Since the pandemic, US GDP has rebounded strongly and is now 8.7 per cent above pre-pandemic levels – that is more than double the 3.4 per cent recorded for the euro zone and five times stronger than the 1.7 per cent seen in the languid UK. Estimates from the IMF suggest that living standards in Europe have fallen by about a third relative to the US since 2000. America has overtaken all the major advanced economies of the EU and this gap is expected to grow through to 2030.
Europeans are simply not showing up. The continent is estimated to have lost 20 per cent productivity relative to the US since the mid-1990s. This fall in output per head is largely the result of a failure to make effective use of new technologies. European companies are often too small and too constrained by regulation to fully benefit from the transformative power of new technology. In general, larger firms are more productive. In the US, big companies (those with more than 250 employees) account for almost 60 per cent of all private sector employment. In the EU, this number falls as low as 12 per cent in Greece and 37 per cent in Germany.
A lack of investment is another part of the problem. US investment is 8 per cent above the 2019 level; by contrast, investment in the euro zone is still 4 per cent below pre-Covid levels. According to a European Commission report, six of the world’s top-10 R&D investors were headquartered in the US. Volkswagen was the only European company to make the top 10. The UK had none. R&D spending of the so-called Magnificent Seven companies – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – amounted to more than $200 billion last year. These seven companies’ investments amount to about half of Europe’s total spending across all private and public sectors. Venture capital investment in US companies was almost three times that seen in Europe (based on KPMG figures).
Europeans are afraid of the future, saving for the rainy day, putting aside 14 per cent of their incomes every year, while the Americans save only 5 per cent. And there’s the problem of Europeans not working as much. The ECB estimates that the average euro zone employee worked five hours fewer than they did before the pandemic in 2020, which translates to two million fewer full-time workers per year. The average hours worked by Americans has remained stable.
The United States builds the world of tomorrow and continues to create new wealth; Europe has resigned itself to specialising in regulation-writing and servicing old wealth, gumming up the economy, exacerbating wealth inequality and, in the process, fuelling electoral anger with populist parties gaining in Italy, Germany, France and the Netherlands. In the UK, the big story of the last election wasn’t the win by Labour but the emergence of the Reform Party as the coming force.
Here in Ireland, the electorate voted for stability against a background of rising incomes, aided and abetted by massive and disproportionate American investment.Of course we have problems. But consider what they would be like had we mirrored economic growth in the EU or the UK. In fact, the problems we have in Ireland are largely centred on the State’s incapacity to deliver infrastructure. We are suffering from the problems of supply, not demand.
As we move forward, Ireland will remain half American, half European. In fact, a combination of both is the ideal trajectory. Imagine if Ireland could keep its American commercial dynamism but adopt some European technocratic competence, such as the ability of the Italians who build among the cheapest metros and railways in the world?
Now that’s a sweet spot well worth aiming at.