German parties battle over our corporation tax
IRELAND'S low rate of corporation tax is under a fresh attack amid a major political row in Germany, the economic powerhouse of Europe.
Chancellor Angela Merkel is being held to ransom by the country's biggest opposition party, which insists it will only form a coalition if she forces Taoiseach Enda Kenny to hike our corporation tax – threatening tens of thousands of jobs here.
The left-leaning SPD party is also understood to be totally opposed to allowing Ireland to access a new bailout fund to recapitalise our broken banks after we leave the bailout.
The demands are a massive shock as the issue of the Irish economy played almost no role in last month's German election.
But now Mrs Merkel is under pressure to force Ireland to raise corporation tax and also support a controversial tax on all share sales in Europe – which has been rejected by Finance Minister Michael Noonan.
Our 12.5pc rate of corporation tax is a cornerstone of Irish economic policy. Foreign companies supported by the IDA created more than 12,000 new jobs in 2012 and employed 152,785 people in Ireland last year. Most of these companies have come to Ireland, in part at least, because of the 12.5pc corporation tax rate.
It is not the first time that Ireland's relatively low corporation tax has angered politicians elsewhere in Europe.
Former French President Nicolas Sarkozy regularly criticised the tax rate, saying it was unfair.
The Government here successfully resisted the pressure from France, but may find it more difficult to refuse Mrs Merkel.
Her recent re-election cements her position as the European Union's most powerful leader. The new debate also shows the problems faced by Mrs Merkel in Germany.
While she is often derided here for her tough stance towards the bailout nations, at home she faces criticism from other parties for giving away too much to countries such as Greece, which are unlikely to repay the money.
European Union law allows countries to set their own tax rates and any efforts to force Ireland to raise corporation tax is likely to be resisted by the UK, Netherlands, Luxembourg and other countries which jealously guard their own tax affairs.
It may be more difficult to deal with demands over the European Stability Mechanism, (ESM) which the Government hopes will smooth our exit from the bailout.
Irish government sources say the reports of Ireland featuring prominently in the negotiations has to be taken in the context of a coalition agreement. But they remain convinced Mrs Merkel will follow through on her promise to provide assistance for Ireland.
"There was a clear commitment given by the Chancellor. That stands. She made a clear public statement to say we were a unique case. She has made a series of very positive statements about Ireland, including just after her re-election," a source said.
And Taoiseach Enda Kenny's position remains to defend Ireland's corporation tax rate. "If the Taoiseach has been clear on one thing, it's not moving on corporation tax," the source added.
A government spokesman declined to comment on negotiations in Germany, but analysts believe the SPD is the most likely coalition partner for Mrs Merkel's CDU party – although she could still form a coalition with the Green Party. But the SPD's demands on Ireland are now a major stumbling block to creating a coalition government. The SPD appears to be opposed to new rules that would allow the ESM to pump money into our banks if they run into trouble following the country's planned exit from the bailout in December.
The existence of this fund gives investors faith in the Irish Government's ability to fund itself, should the country's banks run into new problems following stress tests next year.
Earlier this year Peer Steinbrueck who was the SPD's candidate for Chancellor said he would not seek changes to our corporation tax. But the position has now changed
Mrs Merkel signed off on a plan to allow the ESM to help banks directly in the summer of 2012. That decision angered Germany's central bank which argued that it was wrong, and even illegal, to allow the ESM to help banks directly without permission from governments.
While public opinion in Germany still appears to be indifferent towards Ireland, the news that Anglo Irish executives mocked Germany in the run-up to the bank's collapse is unlikely to have softened attitudes.
Mrs Merkel said in late June at an EU summit in Brussels that she felt contempt for the executives at the centre of the Anglo tapes.