The case of Ireland and its present difficulties does pose a few questions that have a much longer perspective. If the Euro experiment were ever to work, then there would need to be a great degree of monetary co-ordination, along with a fair amount of fiscal co-ordination. The establishment of the ECB has, by and large, achieved monetary co-ordination. It was the role of the Stability and Growth Pact to harmonise fiscal policy by limiting budget deficits to 3% of GDP and public debt to 60% of GDP. The failure of the Stability and Growth Pact, almost from inception lies at the heart of Ireland’s present difficulties.
In recent years, Ireland has based its ‘Celtic Tiger’ credentials on a policy of the competitive reduction of Corporation Tax. Businesses, particularly UK businesses, have responded by relocating in the low tax environment. That now appears to have been something of a mistake. Now that the Irish bubble has burst, the nations bailing out Ireland – the victims of competitive tax policies – have a say in the future management of the Irish economy. Just as the Greek bailout is predicated by the reduction of public spending to more sustainable levels, so an Irish bailout is likely to be predicated by the raising of taxes to more sustainable levels.
This is of tremendous significance because it would imply the loss of Irish fiscal sovereignty. The Irish government has gambled on a low tax Tiger Economy and has lost and now it has to pay the price accordingly.
© The European Futures Observatory 2010