Sunday 25 September 2016

Chances of a spat with Brussels on profit tax have risen

Published 17/01/2016 | 02:30

Public debt as % of National Income 2015 Q2
Public debt as % of National Income 2015 Q2

Senior bank bondholders getting burnt, sovereign debt relief and troika-style reports on the economy. No, I'm not referring to 2011. All of these matters arose afresh last week. And along with the European Commission's finding against Belgium's corporation tax regime on Monday, these happenings serve to show how complicated the economic policy-making process has become. They also suggest that further debt relief on Ireland's bailout loans could be in store and that Apple might be called on to cough up billions of euro in extra profit taxes to the exchequer.

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Let's start with the ever controversial issue of corporation tax.

Ireland, Luxembourg and Belgium are being investigated by Brussels, which suspects that all three countries have given sweetheart deals to multinationals.

Last Tuesday, the commission published its findings on Belgium. It found that the country had breached EU rules and demanded that it recoup €800m in taxes from a range of companies.

There had been intense speculation as to whether the commission would go that far, not least because of the risk to its authority and standing in the event of the countries and/or companies involved successfully challenging its findings in the European courts. That it has pulled the trigger on Belgium must increase the chances it will do so on Ireland.

A decision has been imminent for months and on Friday, the news agency Bloomberg published a detailed story on the Ireland case, which focuses on Apple. Many figures have been flying around about the amount of back taxes the commission could decide the tech company owes, but the Bloomberg analysis produced a figure of $8bn (€7.3bn).

The Government has made it clear that it will appeal any finding against it on the basis that those in the investment-luring business believe hitting companies with big back tax bills would seriously damage Ireland as an FDI location (for what it is worth, I have yet to be fully convinced by this argument).

Bloomberg also reported that the case could be decided as early as March. If the decision comes during the election campaign, people in the government parties will not like having to make the case on the hustings against taking a multi-billion-euro windfall from the world's biggest company.

The prospect of fiscal boost from another source arose in a different Brussels context last week. The Greek finance minister, Euclid Tsakalotos, has been playing a very weak hand well. He is also benefiting from the fact that he is not Yanis Varoufakis, his narcissistic predecessor, who did enormous damage to Greece by his loud-mouthed posturing when he was finance minister in the first half of last year.

While the Greek economy remains in dire straits, some progress has been made in implementing the terms of the third bailout. Delivering on commitments has meant that in return debt relief is back on the table. As this column has long maintained, there will never be a straight writing off of any of the debt because of the political implications it would have in many northern creditor countries. But there is more than one way to skin a cat. Other forms of debt relief can be just as effective.

If the Greeks get improved terms on the monies received from the various EU bailout funds, then there is a strong case for others who owe money to the same funds - Ireland included - to be treated equally.

Indeed, politically, it is hard to see Ireland (and Portugal) agreeing to relief for Greece if they do not benefit as well. That offers the prospect that the already historically low average interest rate on the stock of national debt could fall further.

And that would be positive, given the still huge size of the debt. The accompanying chart shows the most up-to-date comparative data for EU countries and, as is clear, Ireland is still very much at the wrong end of the debt league table (coming in fourth- or seventh-highest among the 28 member countries, depending on the way it is measured).

The risks attached to this are well known and the need to bring debt down to safer levels is a national imperative, a point that has been made by a plethora of bodies both at home and abroad. It is being made again.

Last week, the European Commission's latest post-bailout assessment of the Irish economy was leaked. It reportedly lamented the return to bad old habits of the Government, amplifying the economic cycle with splurges in good times (and austerity in bad times).

It went as far as to say: "Recovery is threatened by recent decisions, which affect the path to a sustainable budgetary position."

That is strong stuff. It is also correct.

Anyone who has completed Economics 101 can see that the case for stimulating the economy now, as it growing at a decent clip, is non-existent. When public debt levels are as dangerously high as they are, the stimulus route is simply reckless.

To finish, consider the fascinating and ongoing case of the burning of €2bn of senior bank bondholders in a Portuguese bank and the role of the European Central Bank therein. Readers will recall that both the previous coalition and its successor concluded that it was worth the risk of haircutting approximately €5bn in senior bonds in the defunct banks - Anglo and INBS - back in 2010 and 2011 respectively.

But on both occasions when they moved to do this, Frankfurt intervened. The ECB threatened to cut Ireland out of the euro system if the bonds were defaulted on for fear that the huge, but then very fragile, bank bond market would go into a panic.

While things have subsequently changed (the bailing-in of all creditors in failed banks, except depositors of less than €100,000, was written into the rules of the EU's banking union), the ECB has an even bigger role in national decisions on banks, given that regulatory responsibility for the largest ones has since passed to it.

But Frankfurt denied last week that it had cleared the Portuguese authorities' decision to burn the bondholders. This raises the intriguing question as to whether the current Government and the last one should not have discussed the matter with the ECB and simply have gone ahead and announced a haircut back in either 2010 or 2011.

Presenting Frankfurt with a fait accompli would certainly have been a high-risk strategy. But if the market had not panicked at the announcement, then the ECB's case against the burning would have been greatly weakened.

If, on the other hand, panic had broken out, there would always have been the option of reversing the decision, however embarrassing that might have been for whichever administration tried it. At this juncture, it appears as if it will fall to the historians to find out the full detail behind Ireland's bond-holder-burning saga.

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