Germany’s use of Irish tax advantages must be seen ‘in the context of the time’
Former German finance minister ‘sees the point’ of Irish people who criticise Germany taking advantage of tax policies it condemned at the same time
Keeping Germany posted: under financial pressure in 2005, Germany decided to sell (securitise) a future income stream from the privatisation of its post office in Dublin because Ireland was a centre for securitisation and its tax situation was more favourable
The innovative idea came a decade ago. Germany was the sick man of Europe, trapped in a vicious circle of negligible growth and spiralling debt, and getting sicker by the day. The ruling Social Democratic Party (SPD) needed money: fast. After securing a narrow re-election in 2002, then finance minister Hans Eichel revealed that the tax take was down at least €30 billion on expectations. Unemployment, up to nearly four million or 10 per cent, was pushing up expenditure at an alarming rate.
Emergency budgets were unable to prevent borrowing rising by 64 per cent in 2002 to €34.6 billion and by one-fifth the next year to around €19 billion. By 2004 Berlin was on its way to its third subsequent budget deficit on the wrong side of the 3 per cent ceiling set down in the EU’s Stability and Growth Pact.
Brussels launched an excessive deficit procedure against Berlin, prompting Mr Eichel to sell off state holdings. To generate further cash, he presented a hit list of tax and investment subsidies.
But the subsidy cuts were blocked in the the upper house, controlled by the Christian Democratic Union (CDU). Mr Eichel asked investment bank advisors to comb Berlin’s books for other options. That, he says now, was when they stumbled upon the future income from the privatisation of the post office.
As part of the privatisation and break-up of the state post office, finalised in 1995, the German state agreed to finance the majority of the legacy pension bill, projected at €550 billion by 2090. The new owners would be asked to contribute around €20 billion in the future. Mr Eichel’s advisers identified this future income was an asset that could be sold off now – or securitised – with the proceeds flowing into Berlin’s distressed budget.
Although, legally speaking, the transaction was completed by the agency charged with managing Bundespost pension fund, sources familiar with the deal say the initiative came from the finance ministry which, in turn, was steered by their banking advisers towards Ireland.
“The banks told us that this kind of business is usually carried out in Ireland,” said one official involved in the transaction. “Perhaps their reason for saying so was the level of expertise there, perhaps tax played a role too. We didn’t question it. We just went along with it.”
Pressure from Brussels
Mr Eichel defends the practice today. Not only was Brussels breathing down his neck, he said, but if total state borrowing exceeded state investment it would, under German law, trigger a budgetary emergency. “Securitisation is a legitimate practice as long as the assets being used are serious,” said Mr Eichel to The Irish Times. “What happened later was that banks were packaging rotten mortgages and securitising them.”
He doesn’t remember all the details of the deal but recalls that banking advisers offered a choice of locating the special purpose vehicle to conduct the securitisation in either Ireland, the Netherlands or Luxembourg. “We could have done this in Germany but Ireland was a centre for securitisation and the tax situation was more favourable,” said Mr Eichel.
Mr Eichel’s successor in the finance ministry, Peer Steinbrück, continued the practice. In the end, the securitisation proceeds topped €15.5 billion, effectively replacing the state’s own contributions – and thus state spending – for two years.