Bailout – Crisis

Depth of euro crisis may push bailout down agenda

• February 23rd, 1928

ANALYSIS: Fixing the currency’s problems will be a very complex task, with many conflicting interests. Giving Ireland a better deal might not be a shared priority, writes DAN O’BRIEN

THE TERMS of Ireland’s engagement with the European Union could conceivably change as much in the coming weeks and months as they have since the State hitched its wagon to the European integration train almost 40 years ago. If this happens it will do so in the context of the continuing talks to redesign the euro’s institutional architecture.

This redesign is being undertaken because the “no bailout” clause, which was a cornerstone of the original edifice, crumbled with crises of Greece and Ireland. Replacing it will be a much more rigorous set of rules governing a much wider range of national policymaking areas. This is inevitable if the euro is to survive, something that is a paramount national interest for Ireland, for all other euro zone members and, indeed, for the entire global economy – no country would escape the severe consequences of the world’s second most important currency disintegrating.

But wide-ranging co-ordination of economic policymaking is not without downside, and in the context in which it is happening, Ireland is extremely vulnerable to the demands of others. Although many of the proposed changes to the euro’s structures are of profound significance, only one (thus far) appears to pose any direct threat to Ireland’s interests. This relates to corporation tax. It is difficult to avoid the conclusion that the prized 12.5 per cent is now, for the first time, under real threat.

In the past, co-ordinating corporation tax issues in Europe was opposed by too many countries to allow it to move far up the agenda. Moreover, Ireland always retained the option of exercising its veto. Even during the bailout talks in November, it was not threatened. None of the three rescuing institutions – the European Central Bank, European Commission and the International Monetary Fund – had an interest in imposing a higher rate on Ireland.

Things are different now. The talks on redesigning the architecture of the euro are taking place among states. Such intergovernmental talks mean that those states which believe Ireland’s corporation tax rate is a means of poaching investment from their economies could make a raising of the rate a condition for the granting of concessions on the terms of the EU-IMF bailout.

Owing to its position on the end of a lifeline thrown by the international community, the State has never been in a worse position to protect its interests. None of this is to say that Ireland is about to be obliged to raise the corporation tax rate, but it is a real possibility for the first time.

Ireland’s interests on profits tax are threatened because they clash with those of other member countries. Ireland’s interests in improving the terms of the bailout are threatened because the issue may be perceived as being less relevant than others in a hugely complex process.

Resolving the current crisis (upon which there is no shared view about its root cause), designing the permanent bailout mechanisms to deal effectively with future crises and ensuring that all the players’ interests are taken into account is a process of enormous complexity.

This complexity is hindering progress towards a deal that is in everyone’s interests. Unfortunately, the process could become more complex still. It is only a matter of time before Portugal seeks a bailout. If it does so before the landmark March 24th EU summit it will – at the very least – distract from Irish issues and may well make the fiscally stronger countries even less willing to offer concessions on bailout interest rates.

Yet another complicating factor is the need to appoint a successor to Jean-Claude Trichet, whose eight-year term as head of the European Central Bank ends in the autumn. Top EU jobs are always hotly contested. More often than not acrimony is generated among the member countries as such jobs are fought over. Given the importance of the ECB role and the existential crisis facing the euro zone, it is no exaggeration to say that the choosing of Trichet’s successor will be the most important appointment in the EU’s history. If pressure grows in the coming weeks to make the appointment soon, Ireland’s bailout may be pushed further down the agenda.

Central to all of these issues will be Germany. In a talk to a Dublin think-tank yesterday, a German commentator, Wolfgang Proissl, did not give reason to be upbeat about Germany taking a constructive and proactive leadership role in Europe. An increasingly Eurosceptic public and media, and a series of elections over the course of this year will severely limit Angela Merkel’s freedom of manoeuvre. Proissl did not need to spell out to a largely Irish audience that giving Ireland better bailout terms would not be a priority for an embattled chancellor.

Nor is there much reason to believe that members of Germany’s elite are a bunch of pro-bailout Europhiles constrained by tabloids and a narrow-minded public. If evidence of this was needed it came yesterday in an opinion article written by the outgoing head of the German Central Bank. Although Axel Weber is yesterday’s man, his hardline views on the future of the euro – set out in the Financial Times – reflected those of most Germans who think deeply about economic affairs.

Germany is Europe’s largest country by population after Russia. It is Europe’s largest economy by far. It is the largest export market for most of its neighbours. It continues to be the EU’s bankroller-in-chief. It is becoming more powerful not only because of its own inherent strengths, but because other big countries are becoming less influential: Britain is retreating to its historical default position of splendid isolation; and Italy’s parochial political system makes it ever more marginal in affairs beyond its borders.

All of this puts Germany in pole position. It may be too much to say that Europe is becoming German, but European Monetary Union has always been German. It is becoming more so by the week.

Dan O’Brien is Economics Editor