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Ireland suffered a catastrophic economic collapse during the Eurozone crisis, yet within just a few years, the country managed to secure a rapid economic and reputational recovery. Desmond Dinan writes that Ireland owes much of its success to what could be called ‘small-state-ism’ – the ability to leverage its status as a small member state to its advantage.
International relations can be unkind to small countries. A Hobbesian system is the worst. At the other extreme, the European Union is the best possible place for a small state to be.
In principle, the EU cherishes the equality of its members. National leaders sit as peers around the head table at meetings of the European Council. In practice, the big member states – notably France and Germany – are more equal than others. But that is a trifling price for small states to pay given the benefits that EU membership provides.
Ireland is a small EU state, though not the smallest. It occupies a category of countries that includes, for instance, Estonia, Finland and Greece. Intrinsically, small states have limited influence in the EU. They lack large diplomatic services and have relatively constrained administrative capacities. Even if economically weighty, they do not have the commercial and financial firepower of most of the big states.
Ireland has been a member of the EU and its predecessor, the European Community, since 1973. The most remarkable thing about Ireland in the intervening years is that, thanks to EU membership, it experienced an extraordinary transformation from poverty to prosperity. By the early 1990s, due largely to a huge infusion of EU funds, Ireland became the ‘Celtic Tiger’.
The second most remarkable thing about Ireland in the EU is not simply how far and how fast the country fell during the crisis of 2009-13, but how rapidly it recovered economically and reputationally. What explains Ireland’s spectacular rehabilitation? In part, it was due to how well Ireland played what looked like a weak hand: its small size as an EU member state, something that could be called ‘small-state-ism’. Three examples stand out: Ireland’s defence of corporate tax minimisation, which is beloved at home but regarded with suspicion abroad; Ireland’s rapid emergence from the financial crisis; and Ireland’s highly successful Brexit strategy.
Ireland has long had one of the lowest rates of corporate tax among developed economies: 12.5%. Together with the influx of EU funds, this was central to the emergence of the Celtic Tiger. It was also central to Ireland’s post-crisis recovery. However, by the mid-2010s Ireland’s policy of corporate tax minimisation had incurred the wrath of the European Commission and many of the big EU countries. Ireland faced uncomfortable insinuations of being a tax haven.
One of the arguments Ireland deployed against its critics was that small countries have relatively few vital interests which, precisely for that reason, must be defended tenaciously. Practicing the art of small-state-ism, as well as deflecting the issue from the EU into the more agreeable arms of the Organisation for Economic Cooperation and Development (OECD) – a larger, unwieldy forum for international economic affairs – Ireland asserted that corporate tax minimisation, a central plank of the country’s development strategy, should be respected and protected. Grudgingly, the big member states relented.
The economic collapse of 2010 was so extensive that Ireland accepted a joint EU-IMF bailout. This was traumatic for a country that had soared in the previous decade. Ireland’s priorities were clear: accept the medicine of austerity that accompanied the financial rescue and repay the EU and IMF loans as quickly as possible. By 2013, Ireland had done so, thanks in no small part to tax minimisation, which continued to entice US multinationals to establish their international headquarters in Ireland....
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