Small countries, such as Ireland, are likely to face higher financing costs for businesses as the European banking system becomes less internationalised and retrenches to focus on national markets, according to a research paper published by the Economic and Social Research Institute yesterday.

Economies in which companies depend on banking lending more than equity financing will be more seriously affected, the report said.

Five countries – Ireland, Greece, Finland, Belgium and Portugal – are expected to suffer a decline in output of almost 2 per cent as a result of retrenchment in the European banking sector.

In a seperate paper published by the same organisation, researchers concluded that the reduction in corporation tax for services companies in the 1990s had a significant positive impact on exports of services.