Ireland beware its saviours

Ideas@TheCentre – The CIS newsletter (Sydney), 26 November 2010

Ireland is the new Greece. Earlier this week, the Irish government asked its European partners for a multi-billion-euro bailout.

To be more precise, the Irish were forced to ask for help. The Portuguese felt that if the Irish sovereign debt crisis continued, it could spread to other countries. Meanwhile, the European Central Bank was increasingly unhappy to lend to the fragile Irish banking system and wanted someone else to bear the risk.

Above all, British and German politicians were becoming increasingly nervous since their banks had invested hundreds of billions of euros in the former Celtic Tiger. Should Ireland fall, these banks would need to be recapitalised or fail themselves.

In the end, the pressure became too much for Ireland’s Taoiseach, Brian Cowen. Humiliated, he had to accept the offer from the European Union and the International Monetary Fund that he had fought for weeks. Now that Ireland has effectively become the second EU protectorate after Greece, it is becoming obvious why the Irish had been so fiercely opposed to help from outside.

Before the first funds to Ireland have even crossed the Irish Sea, the self-appointed saviours of Ireland are already calling the shots in Irish politics.

Over the past two decades, Ireland had transformed itself from one of the poorest European countries to one of the most prosperous. Its GDP per capita is still 20% higher than that of Germany, which is now supposed to pay for the bailout.

The Irish success story could only work because of initial wage restraint and low taxes. Through a corporate tax rate of just 12.5%, the Irish managed to attract many multinational companies, particularly in pharmaceuticals and IT. For an economy on the periphery of Europe, its tax system became one of its key advantages.

Needless to say, other European countries complained about such allegedly unfair tax competition. That they could have lowered their own corporate taxes probably never occurred to them.

In fact, the Irish crisis is the result of a combination of too low interest rates thanks to their Euro membership and the ensuing housing bubble that it created.

The Irish bailout package now offers the unique opportunity to rob the Irish of one of their country’s major selling points. Several European politicians have already demanded an increase of Ireland’s tax rates. Officially, this is presented as a contribution towards restoring public finances. In reality, this is retaliation by Ireland’s more heavily taxed competitors.

The sad irony is that instead of helping the Irish economy, the ‘rescue’ package will undermine the country’s long-term competitiveness.

Poor Ireland: With friends like these, you don’t need enemies.

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