Irish Prepared to Fight for Lower Taxes

Euro zone heads of states led by German Chancellor Angela Merkel and Frech President Nicolas Sarkozy presented an agreement Friday on the European Financial Stability Fund that the parties hope will finally draw a line under the euro crisis.

They must be congratulated for presenting a wide-ranging deal before the allowing yet another run at a euro-zone member by the bond vigilantes. But one issue could yet dissolve the agreement and raise questions about the future of the European project.

The agreement includes a near-doubling of the EFSF’s lending capacity to 440 million euros ($704 million), lower interest rates, more time to pay for Greece and allowing the EFSF to buy the debt of struggling euro-zone members directly in the primary market.

With Portugal enacting further cuts in spending to rein in its deficit, euro-zone policymakers are likely anticipating an encouraging market reaction.

But Ireland could be the wrench in the works.

Ireland's bailout comes with the caveat that it makes concessions on corporate tax.

Newly-elected Irish Prime Minister Enda Kenny is reportedly had heated words with Sarkozy over this demand and is refusing to back down on cutting Ireland’s corporate tax rate. Irish corporation tax stands at just 12.5 percent in order to attract foreign companies to Ireland, many of them American.

Irish to Make a Stand

A poll released by the Sunday Independent in Dublin found that 78 percent of people think the new Prime Minister was absolutely correct to refuse offer a “gesture” to Mr Sarkozy on corporate taxes.

Ireland, which benefited from its low corporation tax for many years, could find one of its few competitive advantages removed.

“If Chancellor Merkel had her way, and Ireland was forced to increase its corporation tax rates, a number of international companies currently in Ireland would leave Ireland and the EU," John Brutton, the former Irish PM told CNBC.com Saturday. "Actual tax receipts would fall, and Ireland’s capacity to repay its debts would diminish. This would be totally counterproductive.”

Having benefited from its membership of the euro and wider EU project in the good times, Ireland could now be set to be one of the big losers in the bad times. Until now the Irish have not turned their anger towards the EU, choosing instead to oust their previous government and question their own role in the lending boom.

Those hoping Ireland will cede ground should listen to the words of Michael McDowell, the former Progressive Democrat leader in the Irish Independent Sunday: "Sarkozy deserves a gesture -- but a gesture involving two digits and no other numbers."