Ireland: Three Questions and a Red Line
Ireland is finally facing a long awaited reckoning. This comes as no surprise.
Rather than run, once again, through the reasons why this has happened, I thought it might be worth setting out some questions – and a red line on which the UK government in particular should be negotiating.
But first, it is worth dealing with one central point: this bail out will not work. Without strong medium near (and preferably near term) growth, there will be no solution to Ireland’s problems and such growth will not emerge against a back drop of severe fiscal tightening, The medicine prescribed by the Irish government, and urged by the UK, will kill the patient.
Three major questions remain. First, what happens after this? Assuming the EU manages to come up with enough cash to keep the economy liquid, what happens next? Do the bond markets now turn on Portugal? And if the EFSF (European Financial Stability Facility) is then used to bailout Lisbon, what if they turn on Spain? The EFSF couldn’t cope with that. What long term planning is being done to come up with a long term, Europe-wide solution? It’s taken a week of leaks and denials to get to this point with Ireland, this bailout has been incredibly badly managed – I doubt much long term planning has been carried out.
Second, what solution will Europe suggest to the Irish growth problem? Monetary policy is tight (in the context of domestic deflation, real interest rates are high) and fiscal policy is off the table. So, presumably, as with Greece the answer will be “structural reforms” and “liberalisation” to raise productivity and the growth potential. Someone will have to explain to me how Ireland, the poster-child for liberalisation, can be reformed further. Exactly what “reforms” are about to be inflicted on the ailing economy?
Finally, is the UK going to lend to Ireland bi-laterally? Why? Will UK loans have a different place in the creditor queue in the event of default (which will come)? Will they have different conditions attached?
And lastly, the red line: Irish corporation tax. Maintaining a 12.5% corporation tax rate was always predatory, and in mine opinion not in the Irish national interest anyway. It is now indefensible. It was indefensible to not raise it whilst cutting pensions, benefits, jobs and spending on infrastructure and public services. In the Irish case “they are all in this together except foreign corporations”.
The Celtic Tiger was not build on structural reforms and low taxes, it was build on foundations of sand: negative real interest rates and an asset price boom.
The pulling in of footloose global companies attracted by the lowest tax rate in the Eurozone not only deprived other states of much needed revenues, it also led to a fundamentally unbalanced Irish economy.
We should not support a bailout that doesn’t involve raising that tax rate.