The eurozone, the group of European Union countries using the euro as their currency, remains a crisis zone. But there is also good news. Ireland, one of the countries hit most severely by the crisis, has clearly begun to reverse its economic fortunes. Dublin, which in 2010 received €85bn from the IMF and the European bailout fund EFSF, will not need additional aid. On the contrary, it may soon be able to return to the international capital markets.
While the situation in other countries such as Greece and Portugal is rapidly deteriorating and the crisis is also threatening to drag down Spain, Italy and even France, Ireland is the only European country where the situation is improving.
The Irish difficulties began when a real estate bubble burst. In 2010, several Irish banks went bankrupt. They were saved by the Irish government, which as a result saw the budget deficit explode to a staggering 32% of GDP, the highest deficit in the EU. In one year, the Irish government debt expanded from 64% to 98.6% of GDP.
Last year, the situation in the southern European eurozone countries rapidly deteriorated. Despite EFSF bailouts and severe austerity programs, their economies contracted. Ireland, however, benefitted from an export-led recovery.
In early 2011, Ireland still had to pay 8% interest on 5-year government bonds, compared to 6% for Portugal. Today, however, Ireland pays less than 6%, while Portugal has to pay almost 19%. This begs the question: Why is Ireland doing so well, although its situation was initially worse than other nations that have made no improvements?
The answer is: low corporate taxes.
Ireland's low corporate tax rate accounted for the country's spectacular growth in the years before the financial crisis: it encouraged foreign investment. Many multinationals and American companies, including Pfizer, Merck, Google and Microsoft, chose Ireland for their European operations. Although France and Germany have been pressuring Dublin for years to raise its corporate tax level, the Irish have never wavered in their resolution to keep the corporate tax at its low level. France's corporate tax rate is 33%, Germany's is 30%, Britain's is 28%. In Europe, only Iceland, which is not an EU-member and has a rate of 15%, comes close to Ireland's 12.5%.
Last year, thanks to the European bailout money and the low corporate tax level, Irish exports managed to grow while in southern European crisis countries they kept falling. The emerald isle has remained attractive to foreign investors who benefit from Ireland's low corporate taxes and its competent workforce who prefer to work rather than strike. Although unemployment levels remain high, Ireland's per capita gross domestic product is today the seventh highest in the EU, surpassing Belgium, Germany, France, and the United Kingdom. Only Luxemburg, the Scandinavian countries, the Netherlands and Austria do better. The Irish decision to consider their corporate tax rate non-negotiable, despite European threats that the EU would no longer help Ireland with emergency funds, has turned out to be the right decision: Ireland no longer needs the European funds.
At the World Economic Forum in Davos last week, Enda Kenny, the Irish Prime Minister, said that Ireland could act as an example to other countries embroiled in the eurozone crisis. "The ship has been turned around," he said. Unfortunately, however, instead of learning the lesson from the Irish example, the leading politicians of the eurozone keep insisting on raising taxes -- in particular corporate taxes.
Last Tuesday, Germany's Chancellor Angela Merkel and France's President Nicolas Sarkozy wrote a joint letter to their colleagues, arguing that European tax coordination is needed "in order to foster growth, removing obstacles to the functioning of the single market and preventing tax abuse and harmful tax practices." By the end of February, Merkel and Sarkozy will present proposals for the convergence of their corporate taxes. Franco-German convergence is the first step towards the introduction of a Common Consolidated Corporate Tax Base (CCCTB) for the entire EU. The European Commission, the EU's (unelected) executive body, wants to introduce such a EU-wide CCCTB.
Under the CCCTB plan, companies operating in different European countries will have their taxes assessed and collected at the EU level. The tax income is then divided by the EU member states based on the size of the company's business within their borders. An Ernst & Young study revealed last year that a CCCTB regime would increase tax receipts for France by 6%. For years, the Commission, France and Germany have been complaining about Dublin's low corporate tax level, which they consider harmful to their own economies. Tax "coordination" or "convergence" is intended to force Ireland and other countries with low rates to raise their tax levels.
Irish Prime Minister Kenny has voiced strong opposition to the CCCTB plan. In February last year, France's Sarkozy tried to intimidate Kenny's predecessor, Brian Cowen, threatening that the EU would not come to Ireland's rescue anymore with additional bailout funds if the Irish did not drop their "American tax model." This proposal did not make much of an impression on the Irishman. Cowen pointed out that "our 12.5% corporate tax rate is a central plank of our drive for competitiveness and an indispensable part of our strategy for recovery."
The intimidation has not stopped. Last October, Olli Rehn, the European Commissioner for monetary and fiscal affairs, announced that "Ireland in the coming decade will not be a low-tax country, but it will rather become a normal-tax country in the European context." In other words: The EU will not tolerate any "American models" in Europe.
The EU's tax harmonizers are not restricting their intimidation to the EU member states alone. For many years, the EU has been pressuring Switzerland -– not an EU member –- to lower its company tax, which, according to the European Commission, is "incompatible" with the free-trade agreement which has been in force between the EU and Switzerland since 1972. Switzerland has an average corporate tax rate of 21%, though some cantons have much lower rates than the national average. The Swiss central government has never attempted to harmonize Swiss tax levels. Contrary to the EU, Switzerland is a real federal state and as such does not need tax harmonization and tax convergence to give the union a semblance of unity.
Europe had better adopt the Swiss example and allow its member states to set their own tax rates. Tax harmonization will eliminate competition and centralize Europe when the opposite is necessary. The fact that tax competition helped Ireland to recover should inspire Europe to allow countries to adopt their own policies, rather than bully them and impose policies from above.