Irish concerned about tax and treaties

The initial stabilisation achieved by the finance package agreed for Greece was broadly welcomed in Ireland. Contagion effects from the Greek debt crisis had begun to erode the gains made by the Irish government in reducing its cost of borrowing through austerity measures so steps to ameliorate the situation were viewed positively. The Taoiseach (Prime Minister) said he had “no hesitation” in signing up to the agreement.11Irish Times: Cowen says he had no hesitation in signing up to pact, 27 March 2010, available at: http://www.irishtimes.com/newspaper/world/2010/0327/1224267175393.html (last access: 18 May 2010).

Owing to the sharp deterioration in its public finances since the onset of the financial crisis, Ireland remains on the target list of what has been described as a speculators’ “wolfpack” that is currently circling the Eurozone herd. Ireland needs to borrow around 20 billion Euros annually to plug the gap in its finances. Happily, it succeeded in raising about 60 percent of its 2010 requirement before costs escalated in tandem with the Greek crisis, but any further prevarication could have proven disastrous for the Irish exchequer. In that context, expressions of European solidarity in the face of threat were gratefully received.

More recently, the Minister for Finance, Brian Lenihan, welcomed the announcement of the larger Eurozone stabilisation package on 9 May 2010, saying: “Member states are showing their resolve to support the overall European economy and the interests of all European citizens.”22Reported by RTE News: Emergency EU funds won’t solve long term problems, 10 May 2010, available at: http://www.rte.ie/news/2010/0510/euro_bailout.html (last access: 10 May 2010). The Taoiseach meanwhile acknowledged that the Greek crisis and the Eurozone agreement means that economic governance will have to be pursued much more actively in the future.

Looking beyond the immediate public debt crisis of 2010, misgivings over the Eurozone’s Stability and Growth Pact are to be found in Ireland as elsewhere. In an effort to slash the deficit, maintain a credible sovereign risk profile and renew commitment to the pact, harsh austerity measures have been taken by the government, resulting in a fiscal consolidation equivalent to 6 percent of the Gross Domestic Product since 2008. But Ireland still has a lot of cuts to implement if it is to get a deficit currently running at more than 14 percent down to the EU target of 3 percent by 2014. There is real concern that taking this much money out of the economy during a fragile recovery could have detrimental consequences. However, this concern is accompanied by the knowledge that even if the Commission decides to be lenient with Ireland on the deficit issue, the international bond markets will not. For example, former Irish European Commissioner Peter Sutherland argues that, regardless of the terms of the pact, further cuts are likely to be necessary on the basis of market confidence.33Irish Times: Harry McGee: Ministers dismiss possibility of early budget due to Greek fiscal crisis, 10 May 2010, available at: http://www.irishtimes.com/newspaper/ireland/2010/0510/1224270049741.html (last access: 10 May 2010).

Within Ireland, there is plenty of opposition to specific government measures, but a general sense prevails that severe belt-tightening is necessary if Ireland is to stabilise its economy and enjoy a recovery. The strongest opposition to the overall strategy in the European context has come from trade unions, some members of which have questioned why the government could not postpone the fiscal consolidation until the economy is in better health. The Greek crisis provides one answer to that question.

There is another important angle to the debt crisis from an Irish perspective, and that is the question of the Euro exchange rate. Last year, the Finance Minister, Brian Lenihan, accused the UK of a competitive devaluation of Sterling against the Euro, asserting that this was causing “immense difficulties” for Ireland.44Brendan Keenan: Lenihan attacks UK over slide in sterling, Irish Independent, 10 January 2010, available at: http://www.independent.ie/national-news/lenihan-attacks-uk-over-slide-in-sterling-1597840.html (last access: 18 May 2010). In a letter to the Financial Times, Manus O’Riordan, Chief Economist of the Services, Industrial, Professional and Technical Union (SIPTU), noted that in the 24 months up to October 2009, sterling had devalued by 25 percent against the Euro. “If any other member state,” he argued, “had sought to address its economic problems by slapping a de facto 25 percent tariff on imports from the rest of the EU, it would have been denounced as a rogue state.”55Accessed on the SIPTU website at: http://www.siptu.ie/PressRoom/TheEconomy/Name,11176,en.html (last access: 18 May 2010). In the context of these difficulties, John Whelan, of the Irish Exporters’ Association, says that Irish exporters would be “quietly happy” with the Euro’s recent sharp slide against the Dollar and Sterling. Ireland had 42.6 billion Euros worth of exports to the USA last year, and the shift in the exchange rate could be worth 6 billion Euros to the Irish economy.66Irish Times: Falling euro set to boost exports and growth, 18 May 2010, available at: http://www.irishtimes.com/newspaper/finance/2010/0518/1224270601272.html (last access: 18 May 2010). Fears of a Sterling sell-off linked to an uncertain general election outcome did not materialise, providing another boon for Irish exports.

The idea of a strong coordination of economic policies in Europe is received ambivalently in Ireland. Despite the Taoiseach’s acknowledgement that better economic governance is necessary, Ireland will be reluctant to cooperate in any measures that compromise its budgetary and fiscal sovereignty at a time of great fragility. A key issue here is sovereignty over tax issues. Ireland’s low corporate tax rate is seen as both a key driver of its recent economic growth and a necessary condition of its future economic recovery. Retention of unanimity in voting on taxation policy matters was an Irish priority during negotiations on the Lisbon Treaty. That aim was fully achieved, and was reiterated in the guarantees secured by the Irish government ahead of the second referendum on 2 October 2009.77See for example: Institute of International and European Affairs: Lisbon: The Irish Guarantees Explained, available at: http://www.iiea.com/publications/lisbon-the-irish-guarantees-explained (last access: 18 May 2010). Any attempt to revive discussions on a common consolidated corporate tax base is likely to be strongly resisted. The opposition Fine Gael party, traditionally a pro-European party, surprised many domestic commentators by coming out strongly against the recent Commission proposals on economic governance, saying they represented an erosion of national sovereignty and alleging that they had the potential to deny Ireland control over its corporate tax rate.

In response to this, and similar statements by the nationalist opposition party Sinn Féin,88Irish Times: European Commission budget proposals deeply undemocratic, 17 May 2010, available at: http://www.irishtimes.com/newspaper/opinion/2010/0517/1224270548498.html (last access: 18 May 2010). Andrea Pappin, Executive Director of European Movement Ireland, called for an informed and adult debate on the issue, saying that it “is important to clarify […] that only an Irish government can change our corporate tax rate, no one else.”99Irish Times: European role in Irish budget, 18 May 2010, available at: http://www.irishtimes.com/newspaper/letters/2010/0518/1224270596195.html (last access: 18 May 2010). Pappin and the government are right to say that there is nothing in the Commission’s proposals about tax harmonisation or a common consolidated corporate tax base, but, as they stand, these proposals do mean that if the Commission and EU finance ministers do not like Ireland’s budget, and the state has already cut expenditure to the quick, then the government would be forced to raise taxes.

From an Irish perspective, another key issue in any discussion about greater economic governance in the EU or in the Eurozone is: will it necessitate treaty change? Any proposal that does will meet with great concern in Ireland as there is little appetite from any quarter for further referendum campaigns (Ireland is obliged by a Supreme Court ruling to hold a referendum on any international agreement that impinges on the state’s constitutional sovereignty). If the EU can continue to find ways, such as the stabilisation fund, which deepen European economic cohesion without resort to new treaties, then Ireland will probably go along with them.

On the Lisbon Strategy and its successor, the Europe 2020 Strategy, the Fine Gael party noted that “[n]ot one of the Lisbon growth strategy objectives set by the EU has been met. Accelerated fiscal consolidation and a fund to act as a safety net are undoubtedly a significant step forward, but what is missing is a European growth strategy that can make an export-led recovery credible in highly indebted countries.”1010Fine Gael Policy Summary, available at: http://www.finegael.org/polcol/a/32/article (last access: 18 May 2010). The government is supportive of the Europe 2020 Strategy, though it would like to see the agriculture and food sectors given more of an emphasis in the EU’s common economic policy.1111Irish Times: Cowen says he had no hesitation in signing up to pact, 27 Match 2010, available at: http://www.irishtimes.com/newspaper/world/2010/0327/1224267175393.html (last access: 18 May 2010). Neither one is included in EU 2020’s five priority areas but both are central to Ireland’s own economic plans. However, the emphasis on research and innovation in the Strategy chimes well with Ireland’s own ambitions. The appointment of an Irish woman, Maire Geoghegan Quinn, as Commissioner for Research and Innovation was therefore viewed positively in Ireland.

    Footnotes

  • 1Irish Times: Cowen says he had no hesitation in signing up to pact, 27 March 2010, available at: http://www.irishtimes.com/newspaper/world/2010/0327/1224267175393.html (last access: 18 May 2010).
  • 2Reported by RTE News: Emergency EU funds won’t solve long term problems, 10 May 2010, available at: http://www.rte.ie/news/2010/0510/euro_bailout.html (last access: 10 May 2010).
  • 3Irish Times: Harry McGee: Ministers dismiss possibility of early budget due to Greek fiscal crisis, 10 May 2010, available at: http://www.irishtimes.com/newspaper/ireland/2010/0510/1224270049741.html (last access: 10 May 2010).
  • 4Brendan Keenan: Lenihan attacks UK over slide in sterling, Irish Independent, 10 January 2010, available at: http://www.independent.ie/national-news/lenihan-attacks-uk-over-slide-in-sterling-1597840.html (last access: 18 May 2010).
  • 5Accessed on the SIPTU website at: http://www.siptu.ie/PressRoom/TheEconomy/Name,11176,en.html (last access: 18 May 2010).
  • 6Irish Times: Falling euro set to boost exports and growth, 18 May 2010, available at: http://www.irishtimes.com/newspaper/finance/2010/0518/1224270601272.html (last access: 18 May 2010).
  • 7See for example: Institute of International and European Affairs: Lisbon: The Irish Guarantees Explained, available at: http://www.iiea.com/publications/lisbon-the-irish-guarantees-explained (last access: 18 May 2010).
  • 8Irish Times: European Commission budget proposals deeply undemocratic, 17 May 2010, available at: http://www.irishtimes.com/newspaper/opinion/2010/0517/1224270548498.html (last access: 18 May 2010).
  • 9Irish Times: European role in Irish budget, 18 May 2010, available at: http://www.irishtimes.com/newspaper/letters/2010/0518/1224270596195.html (last access: 18 May 2010).
  • 10Fine Gael Policy Summary, available at: http://www.finegael.org/polcol/a/32/article (last access: 18 May 2010).
  • 11Irish Times: Cowen says he had no hesitation in signing up to pact, 27 Match 2010, available at: http://www.irishtimes.com/newspaper/world/2010/0327/1224267175393.html (last access: 18 May 2010).

The reports focus on a reporting period from December 2009 until May 2010. This survey was conducted on the basis of a questionnaire that has been elaborated in March and April 2010. Most of the 31 reports were delivered in May 2010.

The EU-27 Watch No. 9 receives significant funding from the Otto Wolff-Foundation, Cologne, in the framework of the ‘Dialog Europa der Otto Wolff-Stiftung’, and financial support from the European Commission. The European Commission is not responsible for any use that may be made of the information contained therein.