A frosty response to Enda Kenny

Two years ago the outgoing Irish government (which just last week lost the general election in a wipe-out) decided to give a state guarantee to its beleaguered bank's bond-holders: meaning that their loans to the Irish banks would effectively carry no risk whatsoever. Most of these bondholders are European banks, mainly German and French. It's rather disingenuous of Jyrki Katainen, Finland’s finance minister to talk of there being "no free lunches” when it comes to the EU's dealings with Ireland, or of the European Commission citing "moral hazard" as an excuse for no going a little softer on Ireland.

I wish I could place a bet somewhere with a guarantee of winning even it the horse dropped dead mid-course. Though I wouldn't have the audacity to mention moral hazard or free lunch out loud; I'd just keep my head down, eat the free lunch and start rewriting the economics dictionary.

"So what could Mr Kenny offer? The obvious concession is a reduction in Ireland’s low corporate-tax rate, which most other EU states resent."

We'd happily offer to reduce our corporate tax rate! Should get us a good few more jobs.
How does 10% sound?

The free lunch that Germany got in the early and mid 2000s in terms of low ECB rates which helped its economy, cost peripheral countries dear, by making money too cheap. It's not just the bond guarantee; Germany has been benefiting from the causes of this crisis for some time, but does indeed want its free lunch.

"Most of these bondholders are European banks, mainly German and French."

Try British and German. French bank exposure to Irish debt is pretty much smaller compared to that of German and British banks.

The other night there was a Fine Gael TD giving an interview just near to the Irish Parliament. She was going on about how dire the economic situation was in Ireland. Meanwhile behind her a stream of upmarket cars - recent Mercedes, BMWs and such like - went past. There was hardly an old crock amongst them.

Economic crises take strange forms.

Of ocurse European leaders are not going to give in to a demand straight away, but the new Irish PM has staked his claim. The rate is only 6%, so that it can be reduced when difficulties come up. Or when countries change governments. There is no reason, not to reduce it, especially as the EFSF (the EU bail-out fund) can probably refinance itself at a much lower rate than the 2.89% it achieved at its first bond issue, which was 9 times oversubscribed.

A reduction of the interest rate from 6% is sensible, both to debtor and creditor. The argument about moral hazard is nonsense. Ireland has the IMF in the country, they will ensure that nobody will take advantage. And to reduce moral hazard in the future, a reining in of the financial sector would help.

And, of course, the banning of credit default swaps, betting on the bankruptcy of Euro periphery countries. That would avoid the biggest moral hazard of all, greedy hedgefunds and speculators trying to make obscene profits out of the misery of others!

Their is a growing feeling in Ireland (from what I can gather in the press and anecdotally)that if the EU doesn't renegociate more sustainable terms that senior bondholders should have their haircut. After all a very pro-European country is being told that they and they alone are responsible for this crisis. Irish hubris and financial mismanagement has been rife these last 10 years but the narrative of Northern European politicians ignores the fear that had Ireland sent the banks to the wall Iceland style then German French and English banks would have serious trouble. The fact that these investor have an EU and IMF imposed repayment scheme and is injustice enough without them flaunting their superiority. Irish banks were foolhardy but European ones possibly more-so and should be punished for their poor investments.

As was recently revealed in an Irish newspaper, the whole European debate on the Irish corporate tax rate is a bit of a red herring. In keeping with the country's "one stop shop" approach to attracting foreign investment, the effective rate of corporation tax payable in Ireland (i.e., after offsetting any allowances, etc), at 11.9 %, is almost identical to the headline rate of 12.5 %. What you see is what you pay, as it were. The situation in other Member States is very different. While both Germany and the UK have stubbornly high effective rates (at over 20 % each), the effective rate in Belgium for example is just under 5 % compared to a headline rate of over 30 %. The most interesting example is France where a headline rate of 34 % becomes an effective rate of just 8 % (lower than Ireland's) once account is taken of multiple allowances, and no doubt the occasional bottle of expensive cognac for the tax inspector! My advice to Mr Kenny when the issue comes up in the European Council later this month is to grab the attention of the other heads of government by announcing that, after due consideration, Ireland is indeed prepared to accept an EU minimum effective rate of corporate tax, of 12.5 % ! !

FFScotland: I'm sure that an interview in Parliament Square in Westminster would feature a backdrop of nice cars, too. It doesn't mean the UK economy is healthy. Parliaments tend not to be located in poverty blackspots.

Refreshing post and refreshing comments. It is about time to expose the German abuse of this situation. I always favour the qui prodest test. And it is clear that the great winner of months of incendiary press statements against the spendthrifts of euroland is Merlkeland, now blissed with the condition of bond buyer haven and taking advantage of a devaluated euro. The loosers, the "pheripheral" european citizen and the european project.
I personally think "l'Alemagne doit payer" is a perfect slogan now, after devastating months of German greediness and selfish calculations.

Germany’s – is now the open hegemon of the eurozone.

At every stage Germany has refused to deal with her own banking crisis and accordingly the eurozones grand bargain protects German bondholders (banks) at the expense of Irish (and other) taxpayers . Germany prefers to offer a limited and expensive extension of her own credit rating as the alternative to pumping huge volumes of real tax payer’s money to bail out her own chronically afflicted banking sector.

German political will 1 rest 0.

Severe pro cyclical fiscal tightening is proposed in the grand bargain for the afflicted members with no suggestion of solidarity transfers to help them mitigate the social pain. So the instruction to countries who already suffer unemployment levels of 20% is to get poor quickly because only poverty can make you strong – Oh but be sure to make your interest payments on time.

German political will 2 rest 0.

Germany has lived off the growth of the club med (in this case including France) because she cannot (or refuses) to generate her growth from within her own borders. German trade surpluses earned from Spain amounted to 3% of Spanish GDP year after year. It is these surpluses that have funded German growth and specifically provided the funding of German loans back to Spain that, in turn, fuelled Spain’s disastrous property bubble. We’d like to loan you back the money that you foolishly spent on our product so that you can foolishly spend even more. Vendor financing. Until Germany can generate growth from within her own borders she should not be sharing a currency with anybody. Intra eurozone trade cannot be stable and eurozone economies cannot converge with so large and so compulsive an exporter in the club. But Intra eurozone trade imbalances and therefore capital imbalances are not addressed or even referred to in the grand bargain – or (more surprisingly) in this Martin Wolf article.

German political will 3 rest 0.

Germany’s fetish for uber hard money and disinflation sets an ECB agenda that in no way accommodates the needs of most members of the eurozone. Germany needs a real interest rate of @ + 4% whilst the club med need one of around - 4.5% to mitigate the huge scale of economic contraction inflicted upon them. Interest rates are now set rise.

German political will 4 rest 0.

It is this pro cyclical combination of fiscal and monetary squeeze which puts this currency area in a counterproductive league all of its own. Contrary to the mythology “Strength through pain” was not the medicine that Germany prescribed for herself when she broke the debt and deficit rules of original growth and stability pact in 2001, 2002, 2003, 2004, 2005, 2009, 2010 and she is certainly going to be in breach again in 2011.

But that was all about East Germany and real solidarity not Europe and rhetorical solidarity.

There is nothing "grand" about this proposal and it certainly isn't a bargain of any kind.

Since Angela Merkel lost the election in Hamburg, we have hardly heard a peep out of her about doing everything possible to "save the euro." No doubt she realizes that she has to save herself first. I hope Enda Kenny can stand up to the Europeans and leave them in no doubt that Ireland's tax regime is its own business. We all know that the corporate tax rate of various European countries is not as it seems. However, if Ireland concedes on this - it is last person leaving turn out the lights! After all, that is all we have left.