- Associated Press
Friday, November 19, 2010

DUBLIN (AP) — Irish and European officials mounted tough negotiations Friday over terms of a massive credit line for Ireland’s debt-crippled banks — with Ireland’s prized low business taxes in the firing line.

Irish officials said talks were under way at several government departments and agencies in Dublin involving more than 40 officials from the European Central Bank and Washington-based International Monetary Fund, most of whom arrived Friday.

The talks are the latest stage in Europe’s yearlong crisis over countries using the euro currency that have too much government debt. Greece had to be bailed out to avoid bankruptcy in May, and some analysts think Portugal may follow Ireland in seeking help from a €750 billion backstop put together to backstop indebted governments .

Officials on all sides cautioned that the talks could stretch into early December, until after Ireland gives more clarity on its plans by publishing a four-year outline for slashing €15 billion ($20.5 billion) from its deficit — forecast this year to reach a stupendous 32 percent of economic output.

The Irish government said the plan, expected to include €4.5 billion in cuts and €1.5 billion in new taxes for 2011 alone, will be published Monday or Tuesday — and won’t include any change to its 12.5 percent rate of corporate tax, among the lowest in Europe.

Officials in Germany, France, Britain and Austria argue Ireland should be prepared to raise the rate, which since the 1990s has been Ireland’s most powerful lure for attracting the 1,000 multinationals that have chosen Ireland as a European Union base.

They argue it’s not fair for Ireland to receive aid from EU partners while simultaneously sticking to a tax policy that amounts to unfair competition. Ireland says the low tax policy is an anchor for keeping employers who generate a fifth of Ireland’s gross domestic product and provide the healthiest stream of tax revenue.

Finance Minister Brian Lenihan, speaking ahead of Friday’s talks, said the defense of the 12.5 percent rate was “a red line” that Ireland would not allow the IMF to cross.

“We will not have economic recovery if we do not retain our strong international export-focused drive. We have to retain the economic policy instruments that allow us to do that,” Lenihan said.

Ireland has been deeply reluctant to accept any EU-IMF bailout, stressing that the state itself has cash reserves sufficient for mid-2011. It fears that any EU-IMF offer will come with painful conditions.

But Ireland’s hand has been forced by a recent run on deposits at Irish banks, which are already receiving a minimum €45 billion bailout. The European Central Bank has been stemming the deposit losses with short-term loans that have ballooned to a reported €130 billion, a quarter of the ECB’s eurozone loan book.

Irish media say the ECB last week leaked its unhappiness with Ireland’s failure to suggest a realistic program for reducing the dependence of Irish banks on ECB cash. Ireland’s representative on the Frankfurt-based bank, Irish Central Bank governor Patrick Honohan, said Thursday he expects Ireland to receive a credit line worth tens of billions of euro that would serve as a backstop for Irish banks struggling to access funds on open markets.

Critics of Ireland’s low tax on business profits say raising it would be the quickest way to increase the state’s income without hurting consumers. Eurostat, the Eu statistics agency, says corporate tax rates in the 16-nation eurozone average 25.7 percent. Only Cyprus and Bulgaria offer lower rates of 10 percent.

Germany and France, whose corporate tax rates stand at 29.8 percent and 34.4 percent, have spent the past decade watching their own companies and U.S. multinationals take root in Ireland.

“There’s only one real reason for that, namely the avoidance of taxes,” said Markus Ferber, a member of the European Parliament for the German Christian Social Union, part of Chancellor Angela Merkel’s governing coalition.

“Politically, it will be very difficult for Germany and France not to demand that Ireland raises its corporate tax rate,” said Daniel Gros, a former IMF economist and director of the Center for European Policy Studies in Brussels.

Supporters of Ireland’s low tax rate say it would be fatal for the former Celtic Tiger to kill off its incentive when it needs growth.

“Any change in the corporate tax regime would be counterproductive to the collective efforts to reduce the budget deficit,” said Danny McCoy, director of the Irish Business and Employers Confederation, which represents 7,500 employers. “Higher rates would mean less revenue for the state, as investment and jobs have the potential to move to countries outside the EU. This would not be in Irish interests or in the interest of the wider EU.”

But many ordinary Irish people are incensed that — in the midst of a crisis caused by reckless Dublin bankers who gambled hundreds of billions on property deals gone bust — the government is bailing out those banks, defending corporate profits, and expecting the population to absorb the vast bulk of cuts and tax rises.

The Rev. Sean Healy, a Catholic priest who leads a pressure group called Social Justice Ireland, called the government focus on protecting bondholders and corporate profits “hypocritical and deeply unjust.”

“Either everything is on the table or it is not,” Healy said. “By taking so many things off the table, the IMF and the government have created a situation where most of the adjustments will be made at the expense of the weak, the sick, the vulnerable and the working poor.”

Nonetheless, there were few signs Friday of protest on the streets of Dublin, only private expressions of shock and disgust that Ireland’s economy had been mismanaged so badly and fallen so quickly since 2008.

“There’s no point protesting. We’ve gambled away our sovereignty, and all we can do is try not to make matters worse,” said Eamon Delaney, a newspaper vendor. “Really, our own leaders have made such a shambles of it, the IMF crowd will hardly do worse.”


Steinhauser reported from Brussels.

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