Merkel's tax imperative

 

ALL POLITICS is local? Not necessarily. Germany’s chancellor Angela Merkel was busy on Monday recalling Tip O’Neill’s maxim, but hardly convincingly. The trouncing Social Democrats gave her party in Hamburg on Sunday, halving its support to below 22 per cent, was scarcely just a local story. Hamburg had a strong European/Irish dimension to it, while Merkel’s European strategy has a distinctly domestic rationale.

The next electoral hurdle, one of six more Länder polls this year, will be the southwest’s Baden-Württemberg, just days after EU leaders meet on March 24th to agree a new euro-bailout package. That will extend the life of the bailout fund, to the disquiet of German conservatives. But Dr Merkel also hopes it will endorse her competitiveness pact – a bid to refashion the euro economies, some would say, in the image of Germany.

The Frankfurter Allgemeine Zeitung, speaking for Germany’s conservative voters, warned ominously after autumn’s Franco-German launch of their competitiveness pact, of Europe being “on the way to the transfer union”. This conjured up images of German taxpayers endlessly funding the feckless – Ireland included – while the country relinquishes its sovereignty. Was it for this, the refrain goes, Germany gave up the D-mark? And Merkel’s problems on the right are compounded by a Eurosceptical lurch by her allies in the liberal FDP.

Whether the competitiveness pact actually addresses the euro’s problems is a matter of some contention. Wolfgang Münchau put it well in the Financial Times: “While the rest of us are debating how to solve Europe’s banking crisis and becoming exasperated by the lack of progress, Ms Merkel is solving a problem in a parallel universe”. That parallel universe is public opinion.

But Merkel needs a sweetener to balance her bailout fund concessions and the dent to German euroconfidence Axel Weber delivered in deciding not to contest the ECB top job. With many elements of the pact toxic to other partners, pressure on Ireland on corporate tax is stronger than ever, especially given our need to negotiate a reduction in the bailout interest.

Germany and France have indicated that they recognise the political impossibility of an Irish concession on the rate itself, but they are digging in on their – and the commission’s demand – for harmonisation of the corporate tax base (CCTB). For Dublin this is just as dangerous a ground. A common formula on tax definitions and allowances, and crucially, on levying tax where profit is really made is likely to pose serious revenue implications for the State and is likely to prove a disincentive to multinationals headquartering in Ireland.

Diplomatic sources suggest that in the last two weeks potential Irish allies on the issue – Estonia, Malta and Slovakia – have all come under substantial pressure and may now be ready to drop their opposition to the CCTB. Ireland will have few, if any, allies and there is a growing conviction in both Brussels and Berlin that the matter is almost a done deal. The incoming taoiseach will face a no-win choice at his first summit.