The former head of the IMF’s mission to Ireland has called for a radical restructuring of the country’s economy, saying that the state is too reliant on multinationals.

Ashoka Mody told this newspaper that Ireland will come under increasing pressure to reform the way it taxes, raising the risk of a slowdown in foreign direct investment. He said this meant that the state would not recover from another recession – a recession he believes is likely.

“If the FDI slows down in a material way, the domestic sources of long-term growth will not be prepared to rev up in a short order of time. They need nurturing over a somewhat extended period of time to be able to deliver medium-term growth of a reasonable magnitude,” he said.

Mody has just published a book on the history – and failings – of the euro, called Eurotragedy: A Drama in Nine Acts.

He said that Ireland needed massive investment in its education system and innovation to secure long-term prosperity, but that our spending on innovation, as well as research and development, was way too low.

He said that Irish investment in R&D is at the same level as peripheral European economies like Greece, Spain, Portugal and Italy, and is a generation behind Asian countries.

“The Asian nations will have the best universities. They already have some of the world’s best schools. Europe in general has fallen ten or 15 years behind the Asians, and the periphery is a generation behind,” he said. “The core focus has to be on education. Where there are well-educated people, the rest happens in an organic way.”

Arguing that Ireland’s recovery would have been infinitely more sluggish without the multinational sector, he said that Ireland should “build a domestic capability so there is a domestic source of growth that is robust and good for Ireland in any case. And if this tax-haven source of growth disappears as it could, then there is an alternative that is needed in any case”.

He predicted that Ireland was going to come under increasing pressure to reform its corporate tax system.

“There’s no question that the whole world is upset with Ireland on that,” he said. “Ireland does get an unfair advantage in terms of attracting investment from multinationals.”

He called on the government to “have a corporate tax system which has fewer loopholes and incentives . . . it’s not just the tax rate, but all the special deals that get done. That’s what annoys, these special advantages”.

When it was pointed out that the state’s position is that no special deals are done in Ireland on corporate tax, Moday said: “If there are none, there’s nothing more I can say. But the Americans and the Europeans seem to have documented that there are. The Irish can say one thing, the others are saying the opposite.” Mody also warned that a major eurozone crisis could be caused by the ongoing political fallout in Italy.

Asked if we could be on the verge of another crisis, he said: “In my view we are. We are sitting poised and a few adversities could tip us onto the other side. With monetary policy that is too tight for Italy, a euro that is too strong for Italy, and world trade growth begins to slow in the later part of this year. The Italian economy could tip over.”

He described the consequences of this for the world as unimaginable.

“Italy is eight times the size of Greece. Italian sovereign debt is the same size as German sovereign debt,” he said.

Furthermore, he said that any attempt to save the European financial system for the second time in a decade, were it to be endangered by mass Italian defaults and bank failures, may not be accepted politically.

“The system will be tested well beyond what it has been tested up to now, and the technical mechanisms that have been put in place have been done without any clear political legitimacy. It’s not like the people of Europe have voted for them,” he said. “If they are applied, there will be a question of who are the winners and who are the losers.”

Mody said that if Europe tried to “muddle through” the next crisis without major reforms to what he sees as its weaknesses, “the political divisions we see today will be aggravated manifold; the sense that some are more equal than others will get magnified manifold. The political fallout of that will leave much longer lasting damage to Europe”.

Mody, who has been a longstanding critic of the austerity medicine imposed on Ireland during the bailout of which he was a part, would not be drawn on whether he was troubled by his role with the EU-IMF-ECB troika.

“There’s an Ashoka Mody who’s an IMF official. There’s an Ashoka Mody who is sitting before you today. And just because they have the same name, you know, we don’t have to be the same person,” he said.

“What I was doing was working for an institution, and the question of why I was doing what I was doing needs to be addressed to the institution, not me.”

He also said that the recession and the policy response of austerity had had long-term impacts on Ireland, despite the recovery.

“There’s no question about that. Policy wounds leave scars. When you make a policy error, it isn’t the case that then you make it up, and say ‘oh well, we made a mistake’, and you correct it in some way. It leaves a permanent scar.”