It is widely understood that Britain’s exit from the EU will create serious challenges for the Irish economy and that the sharp decline in sterling is already doing so. There are, however, two additional threats to the medium-term prospects – a return to normal levels of interest rates and the likely end of Ireland’s corporation tax edge in the contest for mobile investment.

Interest rates

Most banks in Ireland are offering interest rates on deposits of zero, or very close to zero. In Switzerland and a few other European countries, the banks have begun to charge large depositors for holding their funds, so there is actually a negative interest rate.

But any notion that the depositor is being fleeced by greedy banks is a bit too simple. The return on savings was in double digits back in the 1970s, but so was the rate of general price inflation, so the return in real terms was poor. Indeed, it was negative at times and the depositor was getting a far worse deal than appeared to be the case.

In the eight years since the financial crisis erupted in 2008, the rate of inflation in Ireland has been zero on average. So the depositor who receives any interest at all is earning a real return. It would be a mistake for depositors, or anyone else, to celebrate any early return of higher interest rates. Both the Government and the household sector in Ireland are net debtors and a rising interest bill will drain spending power from both. The Government has enjoyed a diminishing borrowing cost on the re-financing of its debts these last few years and household borrowers, notably those on tracker mortgages, have seen monthly repayments fall below the levels they had initially bargained for. The reason rates are low is the policy pursued by the European Central Bank. The ECB’s official lending rate for liquidity provided to banks is zero and it has been buying government bonds in huge quantities, driving down the amounts they pay in debt service and flattering their budget accounts. The decline in the budget deficit here in Ireland has been due in large part to this factor rather than to stringent policy.

The ECB’s policy cannot go on forever. The Frankfurt vaults already hold a sizeable portion of all the eurozone government bonds in issue and the ECB is buying them at a faster pace than governments are issuing new ones.

The programme of bond-buying is scheduled to end in March 2017 but it is widely expected that an extension will be announced at the ECB’s December meeting. The extension will not be indefinite since, it cannot own all the bonds.

At some stage, perhaps later in 2017, the bond purchases will be scaled back and eventually will have to be discontinued altogether. When this happens, the cost of government borrowing will start to creep up again and so will the monthly repayments on tracker mortgages.

Corporation tax

The Apple case has reminded everyone that Ireland’s European partners are gunning for the corporate tax regime that has been a cornerstone of the inward investment model for more than 50 years.

That model has two components – a low rate of tax (currently 12.5%), and an environment of tax policy and tax treaties which facilitates multinationals with operations here in dodging tax liabilities in other jurisdictions. In most cases this means the US.

The EU commissioner with responsibility for competition, Margrethe Vestager, has been making reassuring noises that it is these tax-reducing deals she is targeting, and not the 12.5% rate.

But the rate, even if it can be retained, has already become less of an attraction and is under competitive pressure. Several European countries also have low rates, while others have loopholes which make the effective rate lower than it appears to be.

In Britain, the headline rate has already been cut to 20%. The Sunday Times has reported that the UK government is considering, post-Brexit, a further reduction to 10%, which would undercut the Irish figure. There has been much political blather about the silver lining for inward investment, especially in financial services, arising from Brexit. The prospect of a 10% rate in the UK should sober people up.

The economy has had a decent run these last few years and the recovery from the financial crash has been quicker than many expected. But there is very little likelihood of positive surprises in the years immediately ahead, and plenty of things that could go wrong.

The recovery could begin to lose steam anyway – they always do. The biggest challenge is the construction of a new model for economic growth in Ireland. The days are numbered for exclusive reliance on attracting US multinationals through a favourable corporate tax regime.