ANALYSIS:While Dublin's defiance of German and French clout is not unique, it is weakened by reliance, writes ARTHUR BEESLEY
NOW IT’S serious. A year ago next week, EU leaders consigned Europe’s no-bailout clause to history. They are still trying to figure out what to put in its stead, but the outlook for Ireland seems to be worsening by the day.
As Taoiseach Brian Cowen prepares to take his leave of the European maelstrom in the wake of a humiliating EU-IMF rescue, neither he nor any other Irish politician is in a position to preach economics to their partners in the single currency area.
It is from this perspective that a drive by German chancellor Angela Merkel and French president Nicolas Sarkozy to deepen economic policy co-ordination across Europe stands as a distinct new threat to Ireland’s corporation tax regime. If Ireland was held out as economic beacon in the good times, fellows like Sarkozy now talk of the low tax rate as if it was the product of a rogue state.
Tax, of course, is supposed to be a national prerogative, a matter for domestic policy. The problem for Cowen – and, more importantly, his successor – is that his administration ceded a huge amount of economic sovereignty when the bailout deal was done. Now Ireland’s partners want to bring tax within the net of European policy co-ordination.
Merkel and Sarkozy set the tone yesterday when EU leaders gathered in Brussels to plot the next phase of their battle against the sovereign debt crisis. While they and their fellow leaders were due to debate this issue over lunch, the German and French leaders pre-empted the discussion with a joint declaration.
It is measure of the sensitivity surrounding their plan that diplomats from other countries – Ireland included – were spotted in the room as the chancellor stood side-by-side with the president.
Merkel said Europe must increase its competitiveness, saying the benchmark “should be the member state that shows the best practices”. With these words she made clear her intention to remake the European economy in Germany’s own image.
Sarkozy said Paris was completely aligned with Berlin with a “structural plan” to respond to the challenges Europe faces. “This response means more integration of our economic policies, with the aim of strengthening the competitiveness of our economies,” he said.
Neither leader mentioned corporation tax or any other discrete policy area, but the parameters of Merkel’s “grand bargain” are already clear.
The chancellor is under political pressure at home to avoid expensive bailouts for Germany’s profligate partners. In return for the enlargement of the temporary bailout fund and the creation of a permanent fund, she wants the 17 euro countries to adopt a “competitiveness pact” to ensure good fiscal behaviour by all.
Europe has been down this road before, without much success. What is different this time is that pact would take in policy areas not subject to the rite and writ of EU law.
Merkel’s pact would be an intergovernmental arrangement – operating outside the European treaties – embracing policies on topics such as pensions, wage formation and business taxes.
Agreement on all this is not a given. Little more than a year away from his re-election campaign, Sarkozy would hardly relish a drive to bring the French retirement age close to the current German target of 67 from his own target of 62. That’s not something French voters like.
Likewise, Belgium has been quick to declare opposition to Merkel’s suggestion index-linked wage bargaining should be brought to an end. Luxembourg, too, sees little good in that.
Thus Ireland’s resistance to harmonisation measures in the corporate tax arena does not cast the State as uniquely opposed to Germany and France. What gravely weakens Ireland’s position, however, is the fact that its euro-zone partners are guaranteeing the loans it uses to keep the State afloat.
No support from the euro zone and the lights go out. It’s as simple as that. Now the two dominant euro countries are pushing against Ireland’s corporation tax regime. Merkel wants harmonised rules on the calculation of such taxes; Sarkozy wants to go further by setting a minimum corporate tax for the euro zone at large. In normal times it would be open for Cowen – or any taoiseach – to say to Berlin and Paris, “No thanks, we like things just as they are.” Yet these are not normal times.
The bailout already gives Europe and the IMF a huge say in the running of the domestic economy. Any effort to extract a lower interest rate on bailout loans or any debt restructuring will be judged by Europe’s most powerful leaders through the prism of Dublin’s response to their new competitiveness pact. To say Ireland is cornered might be to understate the situation.
There is more. Merkel and Sarkozy want to hammer out the details of their initiative at a special euro-zone summit around March 4th. Irish voters go the polls one week before that. Cowen’s successor will not be elected by the Dáil until March 9th. By that stage the tough talking may be done. It is a bad scene, very bad indeed.