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The weakness of Euro membership for Ireland

(1.)
http://newsweaver.ie/bloxhamresearch/e_article001314795.cfm?x=bf0GvBb,bcgrvNVl
Bloxham Morning Note
Wednesday, January 14, 2009
Company/Economic News
Strategy – Lex pointing out Ireland’s weakness

The weakness of Euro membership for Ireland is highlighted into today’s Lex column. With the UK doing what is needed to adjust to the new economic reality and devaluing its currency, Ireland is unable to devalue its currency to restore competitiveness. Therefore Lex points out that wages in Ireland will need to fall, something which is exceptionally difficult to achieve. While the Euro zone has provided us with the buffer of a central banking guarantee, the downside pain is in a loss of competitiveness against our nearest neighbour, the UK.

Published by Bloxham
Copyright © 2008 Bloxham. All rights reserved.


(2.)
specials.ft.com/cgi-bin/Common/FTToday/nph-todayEdition.cgi?latest=BACK1_LON
The Financial Times
THE LEX COLUMN
Wednesday January 14 2009
Eurozones of pain

The Irish must be feeling green, and so too the Spanish, Greeks and Portuguese. Over the past week, all four countries’ debt ratings have been placed on review for downgrade.
Dublin, Madrid, Athens and Lisbon may bat away such warnings with reassuring noises about how they will put their financial houses in order – even if they, meanwhile, suffer higher borrowing costs. What they cannot dismiss so easily, however, is the solution to their troubles: deflation.
The potential downgrades are only a manifestation of a deeper problem: a loss of competitiveness. That is largely why the Irish, Greek, Spanish and Portuguese trade deficits are so large and their economies slowing so fast. It has been a long decline. Euro membership lowered borrowing costs, but unleashed a credit boom and a rise in prices – most obviously in housing but also in wages.
Ireland shows the problem writ large. Since 2000, its relative wage costs have risen by 20 percentage points versus Germany. (Greek wage costs have risen by about 5 points.) Export performance has been further hurt by the weakening currencies of two of its major trading partners, the
US and the UK. That is why Brian Lenihan, the Irish finance minister, lashed out at the UK, saying the pound’s fall had caused Ireland “immense problems”. The quick solution would be for Ireland to devalue too. As a euro member, it cannot. Instead it has to deflate.
Germany managed this at the start of the millennium. But as its trading partners were inflating at the time, German prices only had to rise at a slower rate for relative wages to fall. Today, with inflation falling everywhere, that path is not open to uncompetitive eurozone countries.
Instead, wages have to fall in absolute terms. That is immensely painful. It is also politically unpalatable; democracies generally don’t “do” wage deflation. Even East Asian countries, with their more flexible labour markets, did not manage it during the 1997 crisis – or at least not without political change.
The Irish referendum this autumn on the European Constitution may well be an explosive vote.

Lisbon Treaty: mandatory tax harmonisation for Ireland

The Lisbon Treaty amendment on EU harmonized taxes which has not been publicly mentioned so far in Ireland’s referendum debate

Article 2.79 of the Lisbon Treaty would insert a six-word amendment -“and to avoid distorton of competition” – into the Article of the existing European Treaties dealing with harmonising indirect taxes – Article 113. The full amended Article would then read as follows:

Article 113
“The Council shall, acting unanimously in accordance with a special legislative procedure and after consulting the European Parliament and the Economic and Social Committee, adopt provisions for the harmonisation of legislation concerning turnover taxes, excise duties and other forms of indirect taxation to the extent that such harmonisation is necessary to ensure the establishment and the functioning of the internal market and to avoid distortion of competition.”
(The Lisbon Treaty amendment is underlined) . . .Treaty on the Functioning of the European Union

The significance of this short but important amendment is that it would enable the European Court of Justice, which adjudicates on competition matters, to decide that Ireland’s 12.5% rate of company tax, or Estonia’s zero rate, as against Britain’s 28% rate and Germany’s 30% is a distortion of competition which breaches the Treaty Articles dealing with the internal market – Art. 26 and Arts.101-9 TFEU – in relation to which qualified majority voting on the Council of Ministers applies.

The Irish Government’s veto under Article 113 would be irrelevant if those Articles on the Internal Market are invoked as the legal basis for proposing changes in EU tax laws. All the assurances regarding unanimity underArticle 113 would then count for nothing.

Once this amendment to Article 113 is inserted, the European Commission, whose job it is to police the internal market, need only point out that the big cross-national disparities in corporation tax rates and Ireland’s reluctance to accept a Common Consolidated Tax base which would tax company profits on the basis of their sales in different EU countries, at the tax rates prevailing in those countries, constitute a prima facie “distortion of competition” under Articles 101-109.
If Ireland refused to cooperate with what the Commission wanted, the Commission could bring it before the Court of Justice – or another country or firm could institute proceedings against it – and the Court could declare the Irish Government’s tax policy to be unlawful as in breach of the EU’s Internal Market provisions.

Unanimity under Article 113 would certainly be required to introduce any joint rates of company tax, but this Lisbon Treaty amendment would give the EU Commission and Court of Justice ample extra powers to erode Ireland’s low rate of corporation profits tax, whether we liked it or not.

If an Irish-based company had 10% of its sales or turnover in Ireland and 90% in, say, Britain, its profits from its Irish sales could be taxed at 12.5% and from its British sales at 28%, under the scheme the Commission has been mooting. We might even be allowed to keep our 12.5% company tax indefinitely, but its practical benefit would be hugely eroded by proposals such as this, which this six-word Lisbon Treaty amendment is designed to facilitate.

There is no other possible reason for inserting this hitherto virtually unnoticed six-word amendment by means of the Lisbon Treaty.

Ireland’s 12.5% company tax rate, not to mind Estonia’s zero rate, just stand out as being clearly “distortions of competition” on the EU’s Internal Market.
Commission President J.M. Barroso should be asked what is the significance of this six-word Lisbon Treaty amendment to Article 113 on harmonised taxes during his two-day visit to Ireland.

By refusing to ratify the Lisbon Treaty and agree to this important amendment we refuse to hand over to the EU Commission and Court of Justice these new mechanisms to undermine the principal incentive attracting foreign companies to Ireland and keeping many of them in th country. It should be noted of course that Ireland’s low corporation tax rate benefits Iindigenous companies also, and not just foreign multinationals here.

By rejecting Lisbon and insisting on a Protocol in any new Treaty which would protect the principle of tax-competition between the countrries, we make a stand for economic freedom and reject the attempt to impose an economic straitjacket on the EU Member States in the interests of Germany, France and Britain, with their high company tax rates.

Note, incidentally, that harmonizing laws on indirect taxes in the EU is mandatory under Article 113 set out above: “The Council SHALL…”
Anthony Coughlan
Secretary

*Lisbon: mandatory tax harmonisation

The Lisbon Treaty amendment on EU harmonized taxes which has not been publicly mentioned so far in Ireland’s referendum debate

Article  2.79 of the Lisbon Treaty would insert a six-word amendment -”and to avoid distorton of competition” – into the Article of the existing European Treaties dealing with harmonising indirect taxes – Article 113. The full amended Article would then read as follows:
Article 113
“The Council shall, acting unanimously in accordance with a special legislative procedure and after consulting the European Parliament and the Economic and Social Committee, adopt provisions for the harmonisation of legislation concerning turnover taxes, excise duties and other forms of indirect taxation to the extent that such harmonisation is necessary to ensure the establishment and the functioning of the internal market and to avoid distortion of competition.”
(The Lisbon Treaty amendment is underlined) . . .Treaty on the Functioning of the European Union

The significance of this short but important amendment is that it would enable the European Court of Justice, which adjudicates on competition matters, to decide that Ireland’s 12.5% rate of company tax, or Estonia’s zero rate,  as against Britain’s 28% rate and Germany’s 30% is a distortion of competition which breaches the Treaty Articles dealing with the internal market – Art. 26 and Arts.101-9 TFEU –  in relation to which qualified majority voting on the Council of Ministers applies.

The Irish Government’s veto under Article 113 would be irrelevant if those Articles on the Internal Market are invoked as the legal basis for proposing changes in EU tax laws.  All the assurances regarding unanimity underArticle 113 would then count for nothing.
Once this amendment to Article 113 is inserted, the European Commission, whose job it is to police the internal market, need only point out that the  big  cross-national disparities in  corporation tax rates and Ireland’s reluctance to accept a Common Consolidated Tax base which would tax company profits on the basis of their sales in different EU countries, at the tax rates prevailing in those countries, constitute a prima facie “distortion of competition” under Articles 101-109.
If Ireland refused to cooperate with what the Commission wanted, the Commission could bring it before the Court of Justice – or another country or firm could institute proceedings against it – and the Court could declare the Irish Government’s tax policy to be  unlawful as in breach of the EU’s Internal Market provisions.
Unanimity under Article 113 would certainly  be required to introduce any joint rates of company tax, but this Lisbon Treaty amendment would give the EU Commission and Court of Justice ample extra powers to erode Ireland’s low rate of corporation profits tax, whether we liked it or not.
If an Irish-based company had 10% of its sales or turnover in Ireland and 90% in, say, Britain, its profits from its Irish sales could be taxed at 12.5% and from its British sales at 28%, under the scheme the Commission has been mooting.  We might even  be allowed to keep our 12.5%  company tax indefinitely, but its practical benefit would be hugely eroded by proposals such as this, which this six-word  Lisbon Treaty amendment is designed to facilitate.
There is no other possible reason for inserting this hitherto virtually unnoticed  six-word amendment by means of the Lisbon Treaty.

Ireland’s 12.5% company tax rate, not to mind Estonia’s zero rate, just stand out as being clearly “distortions of competition” on the EU’s Internal Market.
Commission  President J.M. Barroso should be asked what is the significance of this six-word Lisbon Treaty  amendment  to Article 113 on harmonised taxes during his two-day visit to Ireland.
By refusing to ratify the Lisbon Treaty and agree to this important amendment we  refuse to hand over to the EU Commission and Court of Justice these new mechanisms to undermine the principal incentive attracting foreign companies to Ireland and keeping many of them in th country.  It should be noted of  course  that Ireland’s low corporation tax rate benefits Iindigenous companies also, and not just foreign multinationals here.
By rejecting Lisbon and insisting on a Protocol in any new Treaty which would protect the principle of tax-competition between the countrries, we  make a stand for economic freedom and reject the attempt to impose an economic straitjacket on the EU Member States in the interests of Germany, France and Britain, with their high company tax rates.
Note, incidentally, that harmonizing laws on indirect taxes in the EU is mandatory under Article 113 set out above: “The  Council SHALL…”
Anthony Coughlan
Secretary
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