Ireland’s focus must shift to Berlin following Brexit

The value of imported German cars has often reached the €1bn mark annually

THE Government is currently finalising a major review of Ireland’s relations with Germany, Europe’s largest economy and the country that has become the most influential in the political and economic union of which Ireland is a part. With the departure of the UK from that union, Germany’s relative influence will grow further.

That is not necessarily a good thing for Ireland. An asymmetry in the power dynamics within the EU’s quasi-federal polity could ultimately destabilise it if smaller countries believe that their voices are not heard, or that bigger ones wield excessive power. But smaller countries should not be passive in the face of that risk. They need to be clever in exerting what limited influence they have.

The extent of that influence depends on many factors. One of those factors is the scale of bilateral economic links and interests, the focus of today’s column.

As would be expected from one of the big European countries, commercial ties with Germany have existed since the foundation of the state.

Perhaps the most notable early business relationship was the role of Siemens (a German conglomerate) in the design and construction of the Ardnacrusha hydroelectric plant in the 1920s, a massive project which cost the equivalent of 20pc of the Free State’s annual budget.

Despite global depression and rising protectionism internationally, Irish-German trade actually expanded in the 1930s, both in absolute terms and as a share of total exports, as the chart shows. World War II ended bilateral commerce, but trade resumed with the newly established West Germany when the hostilities ended.

In the following decades, trade ties increased with German imports into Ireland greatly exceeding Irish exports going the other way until the 1970s, a fact that partly reflects the differing strengths of the two economies in those decades. After joining the EEC in 1973, Irish goods exports to Germany surged, peaking at 14.5pc of the total in 1998.

However, goods exports to Germany fell for a number of years after that, mainly because of the collapse of Ireland’s computer hardware industry.

The recovery since has been led by the chemicals and pharma industry — now Ireland’s primary goods-exporting sector.

In 2016 exports to Germany reached a record €18.5bn, with goods at €8bn and services at €10.5bn, making it the fourth largest destination for Irish goods exports and third largest for services exports.

From a German point of view Ireland’s ranking is more modest: the 28th largest destination for its exports and 15th largest source of imports.

Although detailed data are not available by firm-ownership, it is known that foreign multinationals account for most of Ireland’s exports. While that is very likely to be the for exports to Germany too, indigenous businesses are also interested in the country’s huge market. An ESRI study on Irish-owned exporters found that 5pc of food products and 9pc of non-food goods go to Germany.

Efforts to penetrate the German market, which has long been a target for Irish food exporters, may intensify after Brexit if tariffs are slapped on exports into the British market or if the UK cuts existing tariffs on cheap food producers such as Brazil. While goods export revenues are still below their early 21st century peak, services have boomed, almost tripling in value between 2016 and 2003, the earliest year for which data by country are available. This has been driven overwhelmingly by the IT sector. Computer services sales to Germany, which reached €6.4bn in 2016, accounted for well over half of Ireland’s total services export to Germany, and the share continues to grow.

The second biggest category is insurance services, which were valued at just under €1bn in 2016. Somewhat surprisingly, given the size of the German economy, its banking sector and the considerable presence of German institutions in Dublin’s IFSC, financial services exports stood at just €224m in 2016, a figure that is lower the pre-crisis peak recorded in 2007.

German imports into Ireland are mostly pharmachems, machinery and transport equipment, with autos being the most visible import.

About a quarter of the road vehicles that arrive at Irish ports are from Germany. In the past decade or so the value of imported German cars has often reached the €1bn mark annually.

But the bilateral economic relationship goes beyond trade. German companies featured prominently in Ireland’s push to attract foreign industries from the 1950s. Several set up factories here, encouraged by IDA subsidies and tax breaks.

Some have long ceased operations but others remain, and there have been no shortage of new arrivals, particularly in financial services.

Non-exporting firms have also had a significant impact. The entry into the groceries market of the German discounters, Aldi and Lidl, in the last decade has hugely benefited Irish consumers. It is worth noting that long-term trends in food price inflation registered an inflection point around the time of their arrival and prices today are the same as 15 years ago, and they continue to fall.

As of 2016 there were 92 German-owned IDA-supported companies, employing 12,200 people directly.

The current number of jobs is more than any reported year from the 1970s to 1990s, and numbers have recovered from a fall during the last economic crisis.

Of course, Ireland is not only of interest to German business men and women, but also the wider population through tourism. Germany was one of the early adopters of mass tourism, and the numbers visiting Ireland over the decades have continued to grow.

In 2016, Failte Ireland estimates that 624,000 German tourists visited the country — yet another all-time record — spending almost €400m. As is the case with many economic metrics, Germany is the third largest market after the UK and the US. Additionally, thousands of Germans have made Ireland their home — there were 11,500 people with German nationality living here, according to Census 2016.

Overall, economic links between Germany and Ireland have been growing strongly over many decades.

With the German economy in rude health and showing few signs of overheating, opportunities for Irish business and exporters will continue to expand for the foreseeable future.

While the Irish market will always remain of limited interest to German firms, it will become more interesting for those firms with a presence in the UK which want to remain in the EU but also want a presence in an English-speaking country.

Short of the EU falling apart or globalisation going into reverse, Ireland-Germany economic links look set to widen and deepen.