4 reasons why Ireland’s roar will return

February 1, 2011, 12:51 AM UTC

Ireland’s stringent austerity measures will almost certainly slow its growth in the coming years. But the country is better positioned than most troubled European nations to grow its way out of the crisis.

As the debt crisis continues to unravel in parts of Europe, world leaders and global investors speculate which country could be next. European leaders have already been forced to bail out Greece and Ireland, where leaders have agreed to strict austerity measures to improve their public finances. Now economists are watching Spain, Italy, Portugal and even Belgium for signs that these economies might also need a bailout.

At the same time, some economists are already predicting an impressive rebound from Ireland. Up until 2008, the country was booming with record exports and foreign investments. Ireland was the first stop for corporations looking to do business or expand in Europe, as executives were drawn to the nation’s ultra-low corporate tax rate and its young and educated workforce. But Ireland’s property boom and questionable lending practices, which helped it reach its peak, ultimately ended up leading to its $113 billion bailout late last year and its dubious distinction as one of Europe’s most financially troubled economies.

Despite it all, Ireland is posed to rise again. After all, Ireland is unlike Europe’s peripheral countries and far different from troubled Greece. Here are four reasons why the Celtic Tiger will come roaring back:

Labor market flexibility

Ireland’s labor market is among the most competitive in Europe and even in most parts of the world. Its workforce is highly productive, which has certainly been a draw to foreign investors that want to do business in Europe’s third-largest island.

In 2009, Ireland had the highest GDP per hour worked next to Norway, according to the U.S. Labor Department. Ireland came in at $61.30 next to Norway at $73.26. The United States followed with GDP per hours worked at $57.54.

To be sure, Ireland’s debt troubles will likely dampen productivity in the coming years, as strict austerity measures will probably slow economic growth. But one positive development is the Irish government’s proposal to eventually raise the retirement age to 68 from 66, which could make its labor market more flexible. As in many EU countries, the general retirement age in Greece is 64, although the actual average is closer to about 61. The Irish might have to work longer, but the extra time spent could certainly help shift the economy to a return to better days.

The young and educated survive

Chief among the drivers of Ireland’s economic growth has been its relatively young and educated workforce. It’s helped the country move from being a labor-intensive manufacturing economy to a more high-tech and services-oriented one – attracting some of the world’s largest corporations to the small island. Last March for instance, Hewlett-Packard (HPQ) chose Ireland over other European nations to expand its Global Solutions Centre in Belfield because it needed workers who were highly technical and had language skills.

What’s more, Ireland’s workforce has been ripe for corporate recruitment – its workers are much younger than in troubled Greece. Whereas an estimated 21% of Greece’s workforce will be over the age of 65 by 2020, only an estimated 11% will be over 65 in Ireland, says Constance Hunter, chief economist with Aladdin Capital Holdings.

Certainly Ireland’s demographics have been a natural draw for companies. It remains to be seen how the country’s economic upheaval will impact workers, as many have reportedly been leaving Ireland in search of work elsewhere. Hunter says a brain drain is possible but workers will probably return when the economy rebounds.

Grow out of a bad situation through exports

Ireland’s stringent austerity measures will almost certainly slow down the country’s growth in the coming years. Yet it’s not all a grim picture. The country is relatively well positioned to grow its way out of the crisis – at least externally through exports.

Unlike Greece, Ireland’s economy is overwhelmingly made up of exports — they account for about 80% of GDP versus just 7.2% in Greece. Facing huge debt and deficits, it’s clear both countries will have a hard time relying on demand for goods and services at home. If anyone can look at markets abroad to increase GDP growth, it’s Ireland given the sheer scale of exports its economy already runs on.

Corporations love low taxes

For years, Ireland had one of the lowest corporate tax rates in Europe. At 12.5%, it has been quite competitive in luring record levels of foreign investments, which in turn has supported its export-driven economy. The tax is so competitive that it has become a sore spot for some European nations, particularly Germany and France which have long seen the ultra-low rate as giving Ireland an unfair advantage.

Certainly it remains to be seen if the tax will stay low amid pressures to plug Ireland’s yawning deficit. Ireland officials want the tax to stay the same, but Germany and France could very well use Ireland’s debt crisis as an opportunity to call for an increase. After all, Germany has been a critical source of funding for helping Ireland out of its debt and banking crisis.

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