The European economy has been hit by two huge shocks over the past five years: Covid, and the fallout from the war in Ukraine. Apart from those more immediately affected, there have been repercussions for the wider European population. This is reflected in growing disenchantment with traditional political forces in France, Germany and the Netherlands.
Covid led to closure of a swathe of the economy, and a dramatic reduction in economic output. To counteract this, governments, including our own, offset much of the impact on incomes from forced lay-offs during Covid. As households had fewer opportunities to spend during lockdown, most came through the pandemic without serious economic damage, and many with an enhanced cushion of savings.
The Ukraine war has had more serious long-term economic consequences. It fuelled an inflation surge in a western world accustomed to price stability. While energy prices rose across the globe, Europe’s high dependence on Russian gas made it especially vulnerable when supply of this ended abruptly. While Europe managed to keep itself warm the last two winters, it came at a heavy price. Governments provided some financial insulation for households, but their capacity to do so was limited by the wider economic effects of the shock.
In paying higher prices for its energy, by the end of 2022, the cost of imports to the EU had risen by more than a quarter compared with 2019. Export prices rose too, but at a lower rate – by about a fifth. As the gap between the cost of imports and the value of exports widened, Europe needed to export a lot more to be able to pay for its imports, especially of energy. This adverse movement in the terms of trade meant the fruits of limited growth had to go to pay for necessary imports, not to protect living standards.
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Higher-priced imports, and especially higher energy costs, led to a surge in consumer prices. While inflation has now fallen to more normal levels, and energy costs have come down somewhat, prices remain well above their pre-Covid levels. With limited improvements in incomes to offset this, many European households are feeling worse off. Overall, European consumption per head is now only 1.6 per cent above what it was in 2019, a barely perceptible annual rate of improvement in the period. Some countries have fared worse: Germany’s consumer spending per head is actually lower now than it was in 2019. Even though the main driver of higher prices, and of stagnant or falling living standards, has been the war in Ukraine, many Europeans blame their own governments rather than Vladimir Putin for straitened economic circumstances.
In Ireland, the dramatic rise in corporation tax from foreign multinationals has helped fund a series of relatively generous budgets that have boosted household living standards
Because Ireland depends on imported natural gas to generate electricity, the impact of higher gas prices following the Ukraine war was serious for us. While on average EU electricity prices were 30 per cent higher at end 2023 than they had been in 2019, Ireland’s electricity prices were 50 per cent higher, because of our reliance on gas.
Since 2019, the price of imported goods in Ireland has risen by 15 per cent more than export prices. If we had to rely just on our goods exports to buy necessities abroad, we would indeed be in trouble. However, the burden of paying more for foreign goods has largely been offset by the rise in value of our services exports, with foreign multinationals to the fore. The corporation tax paid in Ireland by multinationals is a key component of the earnings from these services exports.
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Real monthly wages per person in Ireland, as adjusted for changes in the value of money, were actually lower in 2023 than in 2019. However, if you take account of shorter working hours as we opted for better work-life balance, hourly pay in 2023 was still up almost 3 per cent on 2019.
If Irish households had been solely dependent on wages, as in the rest of the EU, they would be little better off today than in 2019. However, last year real after-tax income in Ireland was actually up almost 7 per cent on 2019.
A key factor making Ireland different is the dramatic rise in corporation tax from foreign multinationals. This income has helped fund a series of relatively generous budgets that have boosted household living standards.
Ireland, however, remains exceptionally vulnerable to energy price shocks until we can significantly boost native energy supply through wind and solar. The energy transition can be a win-win. As well as helping the planet, if we can make substantial progress in delivering more renewable energy capacity, we will help insulate the economy from future oil or gas shortages, and associated price shocks.
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