St. Patrick’s Day is usually a time for sentimentally celebrating Irish heritage and, in the United States, for highlighting the contributions that Irish Americans make to our common life.
But this year we need something more. This is a day to do more than toast Ireland; it is a day to offer Ireland moral support as, crippled by the worst economic debacle in almost a century, it struggles to defend its economic and political independence against growing pressure from its partners in the EU.
St. Patrick is famous for, among other things, driving the snakes out of Ireland. Sadly, he could not also get rid of the bankers and politicians, and that is why St. Patrick’s Day 2011 finds Ireland under siege.
It is not the old, familiar enemy this time. The Irish were once expected to pay with their heart’s blood for British imperial glory around the world; many of the soldiers and sailors who kept Queen Victoria’s empire strong were the sons of poor Irish crofters who took the Queen’s shilling because they had no alternative. Now France and Germany (two countries to whom the Irish turned in the past for help against Britain) want Irish taxpayers to pay the full and bitter price for the destructive folly of European bankers. And by fair means or foul the two largest powers in the EU want to force Ireland to give up its low corporate tax rate — widely seen in Ireland and around the world as one of the few tools that country has to promote its economic recovery.
It is rare to see power plays as naked and as brutal as this one in post-Soviet Europe. German and French banks went wild with euro-denominated loans to countries on the EU periphery during the last decade. Housing booms in Ireland and Spain, and the reckless overspending of the Greek government were made possible by feckless bankers. True, Irish home buyers (including speculators and flippers) along with real estate developers took out sketchy loans, but it takes two stupid and greedy parties to create a bad loan.
Fianna Fail, the deeply incompetent party of clueless cronies who ran the Irish government until their well deserved electoral thrashing last month, made a series of destructive decisions that culminated in a panic-stricken guarantee of the Irish banking system — a guarantee that in effect promised to protect owners of bank debt by converting bank obligations into obligations of the Republic of Ireland. The cost of the banking disaster looks to be roughly one third of Ireland’s GDP — the equivalent in the US of a $4.5 trillion bailout.
It is this new addition to Ireland’s debt that has forced the Irish government to rely on bailouts from the IMF and the European Union — and here the Irish have run into Teutonic self righteousness and rigidity. The normally sensible and balanced German chancellor Angela Merkel faces a firestorm of domestic criticism every time it looks as if she is going to put German taxpayers on the hook to bail out what angry German taxpayers increasingly regard as lying Greeks, lazy Spaniards and other worthless Eurotrash. As a result, countries like Ireland that are borrowing money from EU institutions are expected to pay punitively high rates of interest.
To German taxpayers this makes a lot of sense, but it looks a little different in Dublin. There, people are increasingly aware that the chief beneficiaries of the bailout are European banks — mainly German ones who at the moment have about $60 billion in exposure to Irish banks. The German government — in a country whose badly managed banks have gotten themselves in deep trouble in Greece, Spain, Portugal and Italy in addition to their imprudent Irish ventures — does not want to face the real state of its banking system and pay the high costs of restructuring.
Germany in other words is living in denial — and sending Ireland (and the other peripheral euro economies) the bill.
This is what powerful countries do: they export their domestic problems to other countries and stick hapless foreigners with the bills for their own mistakes. (We Americans are famous for exactly this: look at the consequences of our morally and mentally confused drug policies as they play out in Mexico and Columbia.)
But the story gets uglier. One of Ireland’s trademark policies is its very low corporate tax rate. Ireland can’t take foreign investment for granted. Although it has a well educated and English-speaking workforce, Ireland needs to attract business to an island that is not exactly in the geographic center of Europe. A 12.5 percent corporate tax rate (significantly below the nominal rates in countries like France or Germany) has attracted significant investment into Ireland including 600 US companies and high tech companies from all over the world; now more than ever Ireland needs more investment if it is going to rebuild its economy and service its debt.
But France and Germany don’t like competition. They have high corporate taxes (though politically connected companies often get special treatment); why shouldn’t everyone else? At the recent EU summit, the European superpowers put their cards on the table: they were willing to reduce Ireland’s interest rate if and only if the Irish would raise corporate taxes.
This was a brutal abuse of power; when the IMF, the World Bank and other lenders impose conditions on borrowers, those conditions are supposed to be things that might hurt in the short run but would help the indebted countries in the long term. Leave it to the French and Germans to use conditionality to damage a debtor’s economy and ability to pay. (Even longtime allies of the French and Germans like Jean Claude Juncker, the prime minister of Luxembourg were a bit shocked. Juncker denounced the “torturing” of Ireland at the last EU summit.)
Shortsighted European politicians have no right to squeeze Ireland for the benefit of foreign debt holders. Let’s hope on this St. Patrick’s Day that the American politicians celebrating Ireland’s new leaders and basking in the glow of one of the warmest international relationships in the world are giving plenty of moral support to our Irish friends.
It is politically unrealistic and morally wrong for Irish taxpayers to bail out private lenders in full, and the EU will not prosper unless the interests of peripheral countries like Ireland are taken more fully into account. On corporate taxes and bondholder haircuts, Ireland is well within its rights to fight hard for its position, and on this St. Patrick’s Day we should be wishing them every success.