Dispatch: The Irish Bailout and Germany's Opportunity

3 MINS READNov 22, 2010 | 22:20 GMT
Analyst Marko Papic examines the EU-IMF bailout of Ireland and the opportunities it may present for Germany. Editor's Note: Transcripts are generated using speech-recognition technology. Therefore, STRATFOR cannot guarantee their complete accuracy. The European Union and the International Monetary Fund have come to an agreement with Ireland to provide Dublin with between 80 billion and 90 billion euros worth of loans. The bailout will be conditioned on Ireland pushing through a budget deficit reduction plan that will seek to bring the budget deficit below 3 percent of gross domestic product as mandated by eurozone fiscal rules. The terms of the bailout deal are still being revealed but what seems to be clear at this point is that the low Irish corporate tax rate will remain the same. At 12.5 percent, the Irish corporate tax rate is one of the lowest in Europe and has been the point of contention between Ireland and larger EU member states. Countries like France have for long time focused on the Irish corporate tax rate, arguing that it gives Dublin an unfair competitive advantage over Continental economies and that Ireland has been able to attract investors into Ireland with its low corporate rate. However, behind this criticism is also a perception in Paris but also in Berlin that the low corporate tax rate has allowed Ireland to also be independent and to be independent-minded. Dublin is fully funded through mid-2011 and therefore it felt that it was able to protect its corporate tax rate in the negotiations for the bailout right now, it felt it had an upper hand so to say. What has happened now is that Germany seems to have withdrawn the corporate tax rate as one of the conditions for the bailout and has therefore allowed Ireland to keep it for the time being. Germany and France will take a wait-and-see approach with Ireland on this thorny issue and will wait for Ireland to slip up on the terms of its bailout, perhaps bringing up the corporate tax rate at some later point. For Germany, the bailout is another opportunity. First, it allows Berlin to illustrate to the markets the effectiveness of the European Financial Stability Fund (EFSF) which has about 440 billion euro plus the IMF money that brings it up to 750 billion euros. The fund was specifically designed to bail out Ireland, Portugal and Spain if the need arose. Now Ireland is falling down which means that Portugal could very well be next but the Portuguese needs would not be any more to those of Ireland and Greece. And therefore the EFSF has more than enough to handle both Ireland and Portugal. However if Madrid also taps the EFSF, the eurozone and Berlin may soon find themselves without any more ammunition in their clip to deal with further crises. Ultimately Germany does not feel that the current crisis is one of an existential nature. The uncertainty about the eurozone and its markets means that the euro is trading lower, which helps German exports immensely. Furthermore, Germany is using the opportunity presented by the crisis to redesign the European Union and its institutions — especially eurozone fiscal rules and the enforcement mechanisms for those rules. The real test for the eurozone therefore is not the panic level in Madrid or Lisbon or Dublin, but rather the extent to which the policymakers in Berlin are concerned.

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