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Get stuffed, Sarkozy, and take your gall with you

Imagine you are a soldier in a battle and take a bullet in the course of fighting. A day later you are visited in hospital by your commanding officer.

"Thanks for taking that bullet, old sport," he says. "By the way -- and awfully sorry about this -- but you're going to have to pay for your own medical treatment."

It's an imperfect comparison for Nicolas Sarkozy's comments about our corporation tax rate last week. But it isn't that far away. "They [the Irish] cannot continue to say 'come and help us' while keeping a tax on company profits that is half that of other countries," he told us on Wednesday. We Irish are benefitting from an EU bailout and should therefore repay Europe by raising our corporation tax rate -- or so he reckons.

It is no coincidence that his remarks came as eurozone finance ministers were debating whether to cut the interest rate on bailout loans from the EU. There was a strong sense of quid pro quo in both the tone and timing of news from Europe last week.

Of course, the analogy I draw is imperfect and that's because our Government shares a good chunk of blame for the bailout. But it is not far off the mark,for two reasons. First, because Ireland has been a faithful fighter for the eurozone cause. Second, because European leaders and institutions -- most of all Sarkozy's mentor Jacques Chirac -- are directly responsible for an equally large chunk of blame. (Irresponsible coverage of the economy bears a smaller but still significant chunk.)

It was once said that if France was the oldest daughter of the church, Ireland was the most faithful. Ireland was also been the most faithful defender of the eurozone.

A year ago, Jean Claude Trichet praised Ireland for "courageous and convincing" budgetary action. Ireland is also in a much better position than Greece (and Britain for that matter) in terms of its balance of payments, its demographically adjusted debt situation and its industrial output performance.

To be rewarded by being charged one of the most punitive interest rates in the history of bailouts is galling -- or should I say Gauling?

Of the €85bn bailout that did not come from our Pensions Reserve Fund, the interest rate on the €22.5bn charged by the European Financial Stability Facility was almost twice what was charged by the IMF.

To a certain extent, a higher rate was justified: the bailout package is more of an overdraft than a loan. The Government need not and should not draw on all of it, and an incrementally higher interest rate is a good way of making sure it doesn't. But the interest rate level we were charged was too high, and dangerously so.

Also highly questionable was the EU's failure to make some of the bailout non- repayable. As Irish taxpayers have made a non-repayable contribution to the bailout, so should the EU institutions.

To see why, consider now the second reason why the analogy of the soldier taking a bullet is not far off the mark. In 2002 Jacques Chirac and Gerhard Schroeder -- possibly Europe's worst ever leaders -- conspired to ruin the very safeguard that was designed to protect the euro from what has just happened. And that safeguard was, incidentally, put in place not just by one of Europe's best ever finance ministers, but by an Irishman to boot: Ruairi Quinn.

But all Quinn's hard work in securing agreement on the Stability and Growth Pact in December 1996 was completely undermined six years later when Chirac and Schroeder tore up its provisions for the worst of reasons: both were facing elections in 2002 and they needed to splurge cash on their electorates.

So although Portugal had earlier been punished for breaching its rules, the big boys decided to push everyone around. In 2003 the Council failed to punish France and Germany, and in 2004 the pact was rewritten to retrospectively justify this heinous act.

In August 2004 I resigned from the ECB, and in October that year I presented a paper to the Dublin Economic workshop -- later published by the ESRI -- warning that the Stability Pact had been fatally compromised. My paper, Stability Pact Reform; A Look at What Might Have Been, warned that the pact had been turned from a set of traffic lights into a set of speed bumps, merely slowing rather than halting Europe's fiscal decline. And so it came to pass five years later.

But Europe's responsibility goes further than this. In the half century between its foundation in 1948 and the year in which it was replaced by the ECB, Germany's Bundesbank kept real interest rates -- the actual interest rate it set minus the rate of inflation -- at a steady average level of three per cent.

Since its foundation the ECB has let that average slip to less than half of that level. Between 2003 and 2004 it allowed real interest rates in the eurozone to fall to zero, and thanks to much higher inflation in Ireland real interest rates were negative here. (Compared to the damage this did to our economy, Sean FitzPatrick is a bit player.)

The ECB also abandoned the so-called monetary pillar of its strategy -- a prudent cross-check that looked at the rate at which money supply was growing. For several years, money growth exceeded the ECB's target rate of growth of 4.5 per cent a year.

This was a clear sign that eurozone economies were stoking up an overreliance on credit. That overreliance on credit was not just bad for inflation and economic imbalances. It was also instrumental in making eurozone government fiscal balances overdependent on tax revenues from activities that were based on borrowing.

For that reason -- because government finances were dependent not just on cyclical ups and downs of their economies but now narcotically and structurally dependent on excessive property activity -- when the crash came it hit far harder than it should have.

So we should tell any eurozone leader who demands a cut in our corporation tax rate to go and get stuffed. And we should also demand a renegotiation of the terms of our bailout.

Marc Coleman presents 'Coleman at Large' on Newstalk 106-108fm and chairs the National Forum, www.nationalforum.ie

Sunday Independent