“To say Ireland is cornered might be to understate the situation.”

No agreement emerged on the details of Germany and France’s proposed “pact for competitiveness” for the eurozone at yesterday’s EU Council meeting.

The Irish Times reports “a swathe” of opposition expressed at the meeting, while The Guardian editorialises against the German model – but accepts that the eurozone’s “economic rules do need an overhaul”.

The EU Council press release is brief on the topic

The economic situation

The EU leaders discussed the economic situation in Europe and the eurozone. President Van Rompuy stressed that the economic outlook has improved substantially, including in those eurozone countries which recently have been in difficulty, although “there is still a lot of homework to do”. The European Council further agreed on the tasks that need to be completed before the next European Council meeting in March.

Interestingly, RTÉ reports that Brian Cowen has said that the next EU Council meeting will be after 9 March – which is later than was expected and would be just after the next Taoiseach takes office – with a final decision to be made on 24-25 March.  That’s confirmed in a separate Irish Times report which adds

There were sharp exchanges on the issue at an EU summit in Brussels yesterday between Taoiseach Brian Cowen and French president Nicolas Sarkozy, long a critic of Ireland’s 12.5 per cent corporate tax rate.

In the course of a lunch discussion of measures first proposed by German chancellor Angela Merkel, the strained atmosphere between leaders was described as a “bloodbath at times” by a European diplomat. “Mr Sarkozy said: ‘I have saved you, I went to parliament on your behalf’,” the diplomat said of Mr Sarkozy’s exchanges with Mr Cowen. “Sarkozy criticised the Irish choice of the American model. Cowen made clear the toxic system was not due to the American model.”

From an Irish perspective, the going at the summit was said to be “tough”.

And, as the Irish Times‘ Arthur Beesley notes, Ireland’s room for manoeuvre is limited

Agreement on all this is not a given. Little more than a year away from his re-election campaign, Sarkozy would hardly relish a drive to bring the French retirement age close to the current German target of 67 from his own target of 62. That’s not something French voters like.

Likewise, Belgium has been quick to declare opposition to Merkel’s suggestion index-linked wage bargaining should be brought to an end. Luxembourg, too, sees little good in that.

Thus Ireland’s resistance to harmonisation measures in the corporate tax arena does not cast the State as uniquely opposed to Germany and France. What gravely weakens Ireland’s position, however, is the fact that its euro-zone partners are guaranteeing the loans it uses to keep the State afloat.

No support from the euro zone and the lights go out. It’s as simple as that. Now the two dominant euro countries are pushing against Ireland’s corporation tax regime. Merkel wants harmonised rules on the calculation of such taxes; Sarkozy wants to go further by setting a minimum corporate tax for the euro zone at large. In normal times it would be open for Cowen – or any taoiseach – to say to Berlin and Paris, “No thanks, we like things just as they are.” Yet these are not normal times. [added emphasis]

The bailout already gives Europe and the IMF a huge say in the running of the domestic economy. Any effort to extract a lower interest rate on bailout loans or any debt restructuring will be judged by Europe’s most powerful leaders through the prism of Dublin’s response to their new competitiveness pact. To say Ireland is cornered might be to understate the situation.

As ever, read the whole thing.

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