Comment: Tensions in euro zone
The economic downturn has exposed serious tensions in the euro zone. It is no exaggeration to say that if these tensions are not resolved, then it could eventually pave the way for the dissolution of the single currency.
Moreover, the resolution of these tensions
cannot be some safety pin effort that does nothing more that mask the yawning
chasm between core and periphery countries in the euro area. The working
through of these differences has a number of implications for this country -
not least Ireland's much prized 12.5% corporate tax rate.
There are a number of high-profile exponents of fiscal union. The Eurointelligence blogger and Financial Times associate editor Wolfgang Munchau in this issue of the magazine says that fiscal union is essential if the euro zone is to survive in the longer term. Moreover, he says that fiscal union would be de facto political union. If such a union came to pass, then the backlash would reverberate well beyond the traditional eurosceptic quarters.
As it stands, there are no plans at EU Commission level to harmonise the corporate tax rate across the EU. But the political pressure is growing for such a move, particularly from the German Bundesbank and many high ranking politicians. The view is that Ireland has experienced a fiscal crisis which has caused national debt levels to soar. Consequently, the most effective remedial action available is to hike tax rates, including the corporate tax rate.
Ireland's 12.5% corporate tax rate has long been a source of tension in the EU. The Germans have never made a secret of the fact that they see it as a form of tax competition which is unfair and undermines the European social model. But this is nothing more than the Germans wanting it both ways. Moreover, Berlin has sofar not acknowledged that it is in some ways just as culpable as Greece for the problems that are enveloping the euro area.
The German government's official policy is to pursue an export-oriented model of growth. In fact when Chancellor Angela Merkel cited the Swabian housewife as the model German citizen, it was seen as a deepening of a commitment to export oriented policy and a rejection of any moves to boost domestic consumption. The Swabian housewife is famed for thriftiness.
Germany's focus is on increasing competitiveness and ramping up exports. The consequences of this policy is that it is putting even more distance between itself and periphery countries, such as Greece, Spain, Italy and Ireland that have lost competitiveness over the past decade. Under these circumstances, it is going to be impossible to come up with an appropriate monetary policy.
One of the precepts of European integration was that smaller peripheral countries like Ireland were at a disadvantage because they were not at the heart of the euro zone and didn't have big consumer markets to stoke economic activity. Therefore countries like Ireland needed as many levers as possible to encourage growth. Having a low corporate tax rate to attract foreign direct investment was seen as the most effective policy to achieve this aim.
That is not to say that Ireland's tax regime isn't problematic. It became far too reliant on property taxes during the boom years. The tax base has to be widened but the corporate tax rate is a political red herring. It is a small percentage of the overall tax wedge not just in Ireland but throughout the OECD. A low corporate tax rate attracts inward investment which then increases the tax take in other areas.
There is no doubt that there has to be a greater degree of fiscal co-ordination across the euro zone. Budgets have to be designed with more attention paid to responsibilities greater than national self interest. There has to be much greater effort made to increase competitiveness and restore fiscal rectitude among euro-area countries. The commission needs to play a much greater role in surveillance among member states.
It makes sense to create a European Monetary Fund. There has to be some sort of a federal agency to deal with crises when they emerge.
But what is needed more than anything else is an acknowledgement that domestically created imbalances are the biggest threat to the long-term viability of the euro zone. The Merkel administration is looking to make budget deficits unconstitutional by 2016. If she succeeds, then it is going to open up a fault line between core and periphery countries that will eventually put an unbearable strain on the single currency.
If the EU is to ever reach the potential of the sum of its parts, then it has to start acting like a single market in practice as well as name. The Greeks are rightly seen as the laggards. The Germans are the loudest in their condemnation of their fellow euro zone members. But ironically, it is the Germans who pose the biggest threat to European union.
Finding bogeymen such as Ireland's corporate tax rate may cause temporary diversions from the real problems that lie ahead. But in doing so, it will only store up the unbridgeable tensions.
