The Irish Problem?

Following the ousting of Fianna Fail in national elections just three weeks ago, a clear message from the people of Ireland that they were not happy with their current financial situation, the incoming Fine Gael party won a landslide victory on the promise that they would reduce the financial burden of the bailout package on the Irish taxpayer. With the European Stability Fund providing €17.7 billion of Ireland’s bailout package, new Irish Prime Minister Enda Kenny has been seeking to have the interest rate on repayment of this section of the loan reduced from the current level of 5.8%, as it is potentially easier to renegotiate with EU partner states than with the IMF. Olli Rehn, Head of the Commission for Economics and Finance in the EU stated in a parliamentary meeting this past week in Strasbourg that he could definitely see a case to be made for lowering the interest rates on loan packets to Ireland and also Greece, but has not yet since given a more concrete commitment to the situation.

Ireland vs The EU

For Irish MEPs working within the EU, they now find themselves in a unique position, whereby they must work to protect the interest of not only the Irish people, but also work to advance the interests of the European Community. How then, do they resolve this potential conflict? “My first role as an MEP is to represent the interests of the Irish people, who elected me to represent them” says Brian Crowley, MEP. Nessa Childers, an MEP representing the Irish Labour party, who have entered a coalition government with Fine Gael, says “The situation in Europe has changed radically because of this crisis. We have national interests clashing with international interests, and there really is a lot of work to be done on all sides to resolve this situation. But at a certain point, you have to defend your own people.”

With regards to the current interest rate being charged to the Irish Government by the EU, MEP Crowley says “There’s the idea, particularly from a German perspective that the interest rate should be penal, but not exorbitant.” MEP Childers adds that this approach, labelling Ireland as “The bold child of Europe” and using the interest rate to ‘punish’ Ireland is unconstructive. “Whether the Irish people will see it that way, we do not know.” And thus represents a large portion of the conflict currently caused by the crisis of economic governance. With local and regional elections looming on the horizon for Angela Merkel, she has been facing increased pressure from her cabinet and policymakers in Germany to be seen to take a tough stance on debt heavy nations, such as Ireland, Portugal and Greece. As Germany invariably ends up shouldering quite a lot of Europe’s financial burdens they are quite reluctant to soften their stance on a done deal.

Room to maneuvre

This was certainly the attitude of Olli Rehn and the finance commission up to only a matter of weeks ago. Commissioner Rehn had made clear on a number of occasions that renegotiating the terms of any of the bailout packages was not going to be easily done or taken lightly. But as the Irish people voted in a new political party promising a reform of the tough austerity package imposed by the previous Government, it became clear that the people were demanding some sort of change to the current situation. Irish MEP Marian Harkin says “The impact on families, on communities, has been devastating, and coming from Finland which where they know all about the effects of long term unemployment, Olli Rehn knows that. You cannot put the blame for these failures on the shoulders of the citizens of one or two countries. It is unjust. And the European Union cannot be party something that is essentially unjust, then the citizens will lose their trust in it.”

Speaking at a parliamentary meeting in Strasbourg last week, Commissioner Rehn fielded a query from Gay Mitchell, an MEP for the Fine Gael party, asking about the potential progress on renegotiating the interest rate on the EU stability fund section of the Irish bailout package. Commissioner Rehn responded that he could definitely see the potential to renegotiate the interest rates on Irish and Greek loan packages. “I understand it is not pleasant to be in the EU/IMF programme, just ask Brian Cowen, who has recently lost his chair as Prime Minister of Ireland” said Commissioner Rehn. “We are certainly not out of the woods yet. When it comes to resolving this crisis, it is important that we must do it by, for and with the co-operation of all member states, especially as it pertains to the single market.” With these words, Mr Rehn signified that he understood the conflicts of interests which renegotiating bailout deals can present for the European Union. The question now is how can it be done?

Corporation Tax

One potential route towards a compromise may come in the form of bargaining with Ireland’s exceptionally low corporation tax rate of 12.5%. This past weekend has seen this issue fly into the limelight, with German Finance Minister Wolfgang Schaeubl leading the call for Ireland to raise its corporation tax to a level comparable to that of its European partners. And this is not the first time this issue has come up in the EU either. Says MEP Crowley “Every year since 1997, this has been an issue up for debate.” Does he see Ireland being forced into a situation where they may have to use corporation tax as a bargaining chip of sorts? “No. Absolutely not. It’s not just Ireland which is against that. Other countries in Europe, Britain, Denmark, Luxembourg, Hungary, Poland, Sweden would all be opposed to harmonised rates at a European level. Even though the French are pushing it big time.” MEP Childers echoes these sentiments, saying “It would be, politically and economically, suicide to give any way on that. And we’re not alone in being the only country opposed to tax rates being harmonised.”

Irish Enterprise Minister John Bruton stated on Monday, March 14 that Ireland would have to “rigorously and trenchantly” defend its low corporation tax rate, as Finance Minister Michael Noonan meets with other European finance ministers in Brussels to discuss the current state of the Irish banking system which has been held to strict capital investment injections since the arrival of the EU/IMF in November last year so as to prevent a repeat of the situation where there is far too much capital being injected and ‘credit bubbles’ being created and exploited for profit. Speaking about corporation tax, MEP Marian Harkin says “Our corporation tax gives us a necessary competitive advantage. Whether it is unfair or uncompetitive is an entirely different thing, as you have to consider the effective rates. And, some of those screaming the loudest about our low tax rate actually have lower effective rates than Ireland. Certain countries have higher headline rates, but their effective rates are much lower”

MEP Crowley also addresses the potential implications of an increase to Ireland’s corporation tax rate, to a harmonised level across Europe. “Our corporate tax rate is an important tool in our ability to attract industry into Ireland. However, the reality is that a lot of those companies are making decisions about Europe or Asia for their investments. The choice for them, is Ireland or India, not between Ireland and France or Ireland and Germany. So a lot of those companies could be lost to Europe should such a situation arise.” Also addressing this issue to American investors on Wall Street this week was John Bruton, former Irish Prime Minister. Speaking to over 300 business leaders at the New York Stock Exchange on Monday, Mr Bruton said “I am absolutely sure we will get through this with not only our corporation tax rate untouched but also our system of corporation tax unchanged.” Addressing the mounting pressure from Angela Merkel and Nikolas Sarkozy regarding the situation, Mr Bruton said “They must remember our corporation tax regime is one of the ways of repaying these loans, so it would be quite perverse to suggest that we should abandon that policy as that would further frustrate our capacity to repay the loans” Mr Bruton added.

The Future?

So what does the future hold for this situation of ‘economic governance’? On one hand, you have the new Irish Government who must make good on their election promises to reduce the financial burden of the current bailout package for the everyday taxpayer. But at the same time they must safeguard the interests of the corporation tax rate, which is the key to attracting foreign investment into what is now an otherwise damaged economy. On the other side of the fence there are the European ‘masters’ who can’t be seen to go soft on a debt heavy nation, and need to keep Ireland in a stable position to prevent a default on its debts which could lead to dire economic consequences. “If Ireland were to fail, and be put in a position where it had to default on its debts, it’s not just Ireland that would suffer. All of Europe would suffer, because that would put the euro currency under stress and strain that it would not be able to cope with. And it would be a domino effect that would move from Ireland, to another country, to another and so on. So it needs to be handled very delicately.” MEP Childers agrees with MEP Crowley on this stating that if the situation is allowed to reach a crisis point “It will push the Euro to the edge of a cliff.”


One solution is to enforce much stricter regulations on both a European level and a national level. The current situation in Ireland sees the finance department being required to submit it’s financial plans and budgets to the Commission for final approval before implementation, and this is a system which will be built on. “The problem in Ireland was not just a problem of banking, it was a problem of regulation of the banking system, and it was also a problem at the European Central Bank. You had German and French banks, along with the ECB giving loans to Ireland, but no one said, ‘Well there’s too much money going into this one country.’ So there was a national regulatory failure, and a European regulatory failure.” To amend this, there are currently eight new pieces of legislation being created to deal with a common, European wide banking regulatory framework to prevent the conditions which led to the banking collapse from emerging again. MEP Marian Harkin says she hopes the situation can be resolved soon “I’m an optimist about, but the past 9 months have been very grim for Ireland at this level. It will be resolved, there is no doubt about that, because the catastrophe which could follow were it not, I don’t even want to think about that, because Ireland will be left in the rubble if it’s not. I would hope that in two years time, there will be considerable restructuring of Irish bank debt, and the burden will be lifted, somewhat.”


Facts Box:

The Irish economy benefitted enormously from European financial policies, leading to the ‘Celtic Tiger’ economy growing, thanks to low ECB interest rates, and an ever expanding property market and high tech industry investing in Ireland due to its low corporation tax rate.

The global financial crisis of 2008 caused Ireland to fall into recession for the first time since the 1980s. Ireland’s largest bank, Anglo Irish Bank was revealed to have been involved in distribution of hidden loans to property developers, and the collapse of the property market in Ireland nearly brought the bank down, before it was nationalised.

Economic growth and unemployment ballooned throughout 2009 and 2010, with the Government seemingly having lost control of the economic situation. Emigration of workers began rising rapidly, as the country fell deeper into recession. An emergency budget was passed which saw major cuts to healthcare, education and social welfare benefits. Income levies were enforced, and taxes on goods and services increased in an attempt to recoup some of the huge losses experienced by the crisis.

The public reacts with outrage. Industrial action, student protests and public unrest increase over the months of 2010, as Irish taxpayers feel unfairly burdened by a crisis caused in large part by the greed of bankers and property developers which almost led to the collapse of Anglo Irish Bank.

November 2010: Then- Irish Prime Minister Brian Cowen confirms that his Government has had to apply for financial assistance from the European Financial Stability Fund and the International Monetary Fund. On November 28, The EU/IMF and Irish Government agree on an €85 billion bailout package, composed of €22.5 billion from the IMF, €22.5 billion from the European Financial Stability Facility, €17.5 billion from the Irish National Pension Reserve Fund. The Government announces its plans to pass the budget for 2011 prior to the General Election, knowing it will be ousted from parliament.

February 25 2011: The Fianna Fail party which led Ireland into the crisis is voted out almost unanimously all over Ireland, signalling the worst defeat for the party since its inception. Fine Gael, the main opposition party win a landslide victory and enter a coalition Government with the Labour party, seeking to repair the damage of the previous 4 years.

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