GERMANY AND France may press for changes to Ireland’s corporate tax regime as the price of key reforms to the euro-zone bailout fund, senior European diplomats warned ahead of a European summit today in Brussels.
German chancellor Angela Merkel has been working to secure the support of French president Nicolas Sarkozy for an initiative to deepen economic policy co-ordination in exchange for measures to reinforce the rescue scheme in the single currency area.Diplomats believe the two leaders will adopt a joint position in Brussels today as EU leaders prepare to ask European Council president Herman Van Rompuy and European Commission president José Manuel Barroso to develop firm reform proposals in time for an agreement next month.
At issue is a widening of the scope and scale of the temporary euro-zone bailout fund – the European Financial Stability Facility (EFSF) – and the final agreement on the mandate of the proposed permanent bailout fund, the European Stability Mechanism (ESM).
While it is accepted across the board that efforts made to date to bring the sovereign debt crisis under control have not worked, Dr Merkel wants her European partners to deepen policy co-ordination in return for new rescue measures. Diplomats attribute her stance to domestic political pressures flowing from the natural reluctance of Germans to take part in a “transfer union” in the EU. “In blunt terms, this is all about finding a way for Merkel to get change to the EFSF,” said a diplomatic source.
The chancellor has been pushing for the adoption of common corporation tax rule as part of a “grand bargain” to strengthen Europe’s response to the sovereign debt crisis, and Mr Sarkozy has long pressed Ireland to increase its 12.5 per cent corporation tax rate.
With a modest reduction in the interest rate on Irish bailout loans on the table, diplomats believe the EU’s two dominant powers may seek business taxation concessions from Ireland in exchange for more favourable bailout terms. “There is potentially a very real link,” said a diplomatic source.
It is understood caretaker Taoiseach Brian Cowen will argue any uncertainty over corporation tax could compromise Ireland’s recovery. As Ireland hopes its EU-IMF rescue package will enable it to regain enough investor confidence to facilitate re-entry to private sovereign debt markets, Mr Cowen is also likely to say that any change to Ireland’s business tax regime could be counter-productive. He is likely to point out about one-quarter of the companies listed on the CAC 40 stock exchange index in Paris pay no corporation tax to the French state.
While Dublin has been trying through diplomatic channels to ease pressure from the Franco-German duo on corporation tax, it is acknowledged Ireland is in a weak position. However, Ireland believes Malta, Slovakia and Estonia are supportive of its stance on business taxes.
Dublin’s feeble position is reflected in suggestions Ireland could do little to prevent the convening of a special euro-zone summit to discuss the reform effort in early March, days before the Dáil reconvenes. “Our leverage on all of this is minuscule. We have to play this as it lies,” said an informed source.
Also in the frame in Dr Merkel’s proposal is a harmonisation of pension age rules. Diplomats say this could lead to divisions with Mr Sarkozy, who faces huge resistance in France to his efforts to raise the French pension age. In addition to stricter limits on public debt and budget deficits, she also wants to rewrite European wage determination rules.
Dr Merkel believes the new rules should operate – like the EFSF and ESM – as an inter-governmental system outside the writ of the established EU institutions. This has met resistance from Mr Barroso and other commissioners.
