Cause and Effect in European Politics and Law

Ireland will get a loan interest rate reduction without having to raise the corporate tax

Adelina Marini, May 9, 2011

Ireland will after all get a reduction of the interest rate of the bailout it got from the EU and the IMF, moreover without being forced to raise the corporate tax of 12.5%. This has been reported by the Sunday Times and the BBC, both quoting government sources. It is expected the European Commission to adopt a written procedure this week, with which to officially announce its support for Ireland to get a reduction of its interest rate by 1%. The procedure, however, must be supported by the rest of the member states, which is expected to happen during the meeting of finance ministers (Ecofin) on May 16th.

The Sunday Times newspaper quotes a government source, according to whom the issue of corporate tax raising is off the table and, in spite of that, no resistance for the interest rate reduction is expected. Germany and France were the biggest opponents of Ireland's request for a reduction of its interest rate by 1% unless Dublin did not raise its corporate tax.

It is still not clear what exactly would ensue by this reduction but 1 percent could be worth 400mn euros, the BBC estimates. The media quotes a spokesperson of the Irish government to had said that the reduction of interest rates was yet to be approved by the member states. The loan Ireland received from the EU and the IMF amounts to 67.5bn euros and is for three years with an average interest rate of around 6% (5.8%) because of the various sources of money.

Against the backdrop of the situation with Greece, though, as well as the resistance of the new government in Finland against the bailout for Portugal, it is not clear what will be the condition for the Irish reduction. According to the Sunday Times, quoting a government source, it is possible in the centre of the talks to be an acceleration of the pace of austerity. According to a source with the finance ministry, however, the speed of implementation of the Irish programme was hardly an issue.

The government in Dublin believes that the situation with Greece, together with the bailout for Portugal, forces the EU to change attitude regarding the economic crisis in the peripheral states.

The Greek reduction of the interest rates was agreed during the extraordinary euro area Council on March 11, when the new Irish Prime Minister, Enda Kenny, was given a deadline by the spring European Council on March 25 to reconsider its pre-election promises and to agree to raise the corporate tax in order to obtain a reduction of the interest rate. The Pact for the Euro+ and the permanent rescue mechanism for the euro area, however, took Ireland off the agenda of the March summit.