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EU may give Irish voters rude awakening on bailout

22 February 2011, 10:59 CET
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(BRUSSELS) - Irish voters may believe the government they vote in on Friday will be able to wave a magic wand and overnight change the terms of their hated international banking bailout.

But the hard reality as 3.2 million voters go to polls is that the "room for maneouvre" some European Union officials see on repayment may only come into play if Dublin cedes its defining business taxation policy.

"Both sides are boxed-in the way this debate has unfolded," notes one EU diplomat of the battle over tens of billions of euros of debt that may take generations to repay.

The question of how much to penalise over-spenders cuts to the heart of the EU debate on the size, shape and scope of its future eurozone rescue mechanism post-2013, due to be concluded by a March 24-25 summit of leaders.

EU economic affairs commissioner Olli Rehn recognises that debt repayment sustainability means it is essential to reach a political consensus on rates, while Eurogroup head Jean-Claude Juncker also admits debate is "under way."

However, "there is no deal at this stage to lower the Irish rates," an EU diplomatic source insists.

"How would you answer states that maintain good housekeeping who say rates must remain high for one simple reason: to discourage difficult pupils.

"Put bluntly, any signal showing that Europe is not absolutely determined to impose strict budgetary rigour will go down badly with the European Central Bank... and could lead other states to ask for extensions," the diplomat said.

The ultimate goal of bringing Ireland's deficit back under a three-percent-of-GDP EU ceiling in 2015 is considered immovable in Brussels, even if some argue an extension to 2016 will be needed.

"It is essential to respect the plan... especially for 2011," Rehn said of the agreement for a 67.5-billion-euro international bailout signed in December with the EU and the International Monetary Fund. Ireland is topping up the rescue with money from its own pension fund.

Rehn's fabled flexibility only concerns "the outer years" of the programme, meaning a potential delay for the heaviest repayments load, but no change to the overall cost of the debt, Brussels officials underline.

As voters feel the pinch from the tax hikes and cost-slashing measures in December's harsh austerity budget, 82 percent want a renegotiation, a recent poll showed, but more than half believe such attempts are unlikely to succeed.

While Rehn would support changes to the formula governing interest rates charged of Ireland at the time loans are provided, he recognises that these could only come about "for overall European reasons."

Diplomats say that is code for a climbdown on Dublin's rock-bottom corporation tax rate of 12.5 percent.

If eurozone paymaster Germany is to back down and crimp interest rates the Irish opposition have labelled "punitive," Dublin will have to go the other way and raise the knock-down business rates it has used so successfully over so many years to attract inward investment.

A call for a "minimum" company tax rate across the eurozone, if not harmonised levels, forms one plank of initial ideas mooted by Germany and France under a so-called "competitiveness" pact that has nevertheless stirred angry opposition among partners.

Foreign companies employ about 139,000 people and account for over 75 percent of Irish exports.

The favourite to become Ireland's next Taoiseach, Fine Gael's Enda Kenny last week outlined to Germany his intention if elected "to seek changes to the content and cost of the EU/IMF bailout deal." He already delivered this message to the European Commission last month.

But politically, he cannot stray from his equally firm position that Dublin is "not prepared to countenance any changes to Ireland's corporate tax rate," which would be seen as devastating for Ireland's economic recovery.

Ireland would find some sympathy on the continent because Greece is also trying to lengthen its repayments schedule, and some finance ministers, such as Belgium's Didier Reynders, want "the same treatment" for all currency partners that are struggling.

Outgoing finance minister Brian Lenihan has complained to European partners that Greece, rescued last May, is paying an average of 5.2 percent on its loans, whereas Ireland agreed to pay on average 5.8 percent.

But for Irish citizens still shell-shocked by the rapid boom-to-bust that has shattered the one-time Celtic Tiger economy, the equality in question may not amount to more than similar firmness with Greece.


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