Ireland's economy was widely known among international investors for its strong economic growth between 1995 and 2007. Unfortunately, the global financial crisis of 2008 changed that sentiment and the country soon became one of the "I"s in the PIIGS acronym. While the country has slowly recovered since then, it has yet to return to its pre-crisis growth rates.
Ireland's Fighting Economy
Ireland's economy began in a state of nationalism in the 1920s and 1930s, with high trade barriers and tariffs, particularly during the economic war with Britain. While other European countries were rapidly growing, these policies led to economic stagnation in Ireland. But ultimately, these more open policies were adopted in the 1950s and 1960s.
In 1987, Fianna Fail reduced public spending, cut taxes and promoted competition in ways that spurred strong economic growth and foreign investment over the ensuing years. Between 1995 and 2007, the country became known as the "Celtic Tiger" - a reference to the "Asian Tigers" - with growth rates that averaged between 7% and 10%.
The global economic crisis of 2008 halted this growth, with Ireland being the first European country to enter recession. Growth in gross domestic product (GDP) fell from 4.7% in 2007 to -7.1% in 2009, but a recovery began to take hold in 2011 and 2012. But the country's property sector continues to struggle, hurting the solvency at many commercial banks.
Investing in Ireland with ETFs & ADRs
The easiest way to invest in Ireland is with exchange-traded funds (ETFs), which provide diversified exposure in a single U.S.-traded security. The most popular Irish ETF is the MSCI Ireland Capped Investable Market Index Fund (NYSE: EIRL), which has a net asset value of $12.8 million, 21 holdings and a 0.52% expense ratio, as of December 2012.
Investors looking for more specific exposure can also purchase American Depository Receipts (ADRs), which are U.S.-traded securities that mirror foreign stocks. While these represent easy ways to gain exposure to individual companies, investors should be aware of the potential foreign tax liabilities and/or offsetting U.S. tax credits before purchasing ADRs.
Some popular Irish ADRs include:
- CRH plc (NYSE: CRH)
- Elan Corporation plc (NYSE: ELN)
- Bank of Ireland (NYSE: IRE)
Benefits & Risks of Investing in Ireland
Ireland's economy may have experienced a fall post-2008, but its low corporate tax rates and friendly business environment could pay long-term dividends.
Benefits of investing in Ireland include:
- Favorable Corporate Tax Rates - Ireland has some of the lowest corporate tax rates in the developed world, with a 12.5% trading income and 25% non-trading income rate, and is often cited as an example of tax competition.
- Strong Plan to Resume Growth - Ireland has instituted a plan aimed at restoring its public finances and bringing its deficit into line by 2015 by reducing the public spending by 10 billion euros and raising value added taxes by 5 billion euros.
Risks of investing in Ireland include:
- Eurozone Exposure - Ireland's membership in the European Monetary Union limits its ability to raise or lower interest rates to combat inflation or deflation, and could therefore potentially limit its ability to respond to a domestic economic crisis.
- High Public Expenditures - Ireland has the third highest unemployment benefits among OEDC countries, while having one of the highest percentages of the population at risk of relative poverty in the European Union.
Key Takeaway Points
- Ireland's economy is known for its low corporate tax rates, which have attracted many multinational companies to its shores.
- While the economy grew significantly between 1995 and 2007, the global economic crisis took a high toll between 2008 and 2011.
- Investors looking for exposure to the country should consider the MSCI Ireland Capped Investable Market Index Fund (NYSE: EIRL) ETF.