Harmonisation within limits


THE CONVENING in early March of a special euro-zone summit to consider Franco-German proposals for a “competitiveness pact” promises to confront a new Government with huge, unwelcome policy challenges from Day One. The price for German support for expanding and reforming the EU bailout mechanism and its successor, the pact is about giving new economic underpinning to the euro by aligning states’ policies with best performers – ie Germany.

Alarm bells have gone off in Dublin because one of the central demands is the harmonisation of the corporate tax base, a collective determination of how and, crucially, where companies should be taxed that threatens Irelands generous and stategically crucial regime.

The issue remains a national prerogative under EU treaties, but Ireland’s current dependence on partners’ generosity makes it very vulnerable to the case that it should “voluntarily” harmonise. Dublin will rightly continue to strongly resist such pressure, as Taoseach Brian Cowen did in frank exchanges with French president Nicolas Sarkozy at Friday’s summit. We will argue that figures show real tax levels are not so far out of kilter as to cause concern and that “tax competion” is desirable.

The Franco-German proposals have yet to be fleshed out, but also include harmonisation of retirement ages, the abolition of wage indexation to inflation, and common bank crisis-resolution mechanisms. Each has its own vociferous opponents. The Belgians and Portuguese will defend their wage systems. The Austrians, and the French, who recently with difficulty raised the retirement age to 62, will fight the pension plans. And Ireland can expect Estonia, Malta, and Slovakia to back us on tax. States which see the Commission’s role as key to balancing the interests of small and large will be perturbed by the intergovernmental nature of the pact.

Part and parcel of the package is also the German idea of a “debt brake”, a constitutional mechanism in each state that would prohibit governments from overborrowing. The idea has been well-received by Fine Gael and even Labour, although whether such a constitutional amendment would be desirable or politically achievable in Ireland needs proper debate.

How would such a provision have helped manage Irelands current debt crisis? Proponents will argue that it might just have forced us to look earlier at unsustainable revenue reliance on property taxes, although that unsustainability appears only to have been clear in retrospect. It would have had no impact on the debt that arose from the bailout of the collapsed banking system, except perhaps to have made the bailout itself illegal.

However desirable in theory, a debt brake aimed at preventing irresponsible conduct by government would have been irrelevant and could well have seriously exacerbated the crisis. A referendum would certainly prompt a row about EU “bullying” and loss of sovereignty and would be far from certain to win approval. “No” campaigners would link it to “broken” assurances that our corporation tax could not be touched, an argument that any government would revisit at its peril.