Reports from Europe that plucky Enda Kenny held firm under pressure from the French and Germans to surrender Ireland’s low corporation tax rate in return for a cut in the interest rate paid on IMF/EU funds to help it bail out its ailing banks, misses the point.
The demands to Ireland are in contrast to Greece, which was granted an interest rate reduction and and extended repayment schedule at the talks.
French president Nicholas Sarkozy’s call for “increased tax policy coordination” may reflect continental frustration at revenues lost to Ireland as bookkeeping entries move tax liability to a low-tax country, but with or without changes to tax and interest rates, Ireland is still in trouble.
And so, as a result, do the other members of the 17-country eurozone.
European leaders meet again in two weeks time to debate taxes and support for the euro, but in the meantime, they should look at some raw numbers.
Ireland received €67.5 billion euro as part of the rescue deal brokered last November. Interest on the loans averages at 5.8 percent. Ireland’s national debt is heading for 125 percent of GDP by 2015, the year in which we reach EU target levels for borrowing.
Quite simply, Ireland cannot afford that level of debt. As Nobel laureate Paul Krugman has argued, Ireland needs debt relief, not a bailout. Markets are still pricing Irish bonds at levels approaching ten percent, because they don’t believe Ireland can afford to repay. As long as interest rates stay at those levels, Ireland will stay out of the market. And when Ireland defaults, the guarantee goes, and with it, not just Ireland’s banks. Europe’s banks are in trouble too.
This is not an argument for charity for the poor old Irish. The crisis is not simply an Irish one, but European in scale. Ireland alone cannot pay, and will inevitably default. If eurozone countries really want to preserve their international currency, they need to act at a European level, and that doesn’t mean tinkering with the interest rates Ireland pays on its debts. It means sorting out the banking sector at a European level.