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Fiscal Union Probably Means an End to Irish Republic’s USP

This Friday on the anniversary of the Maastricht Treaty draft and amid a likely worsening economic outlook (Eurozone GDP out Tuesday) the EZ economies should announce moves to rein in the spending of the southern European states & complement this with a plan to harmonise fiscal policy. This will mean among other things bringing tax rates in peripheral nation states into line with eurozone leaders France & Germany.

For Dublin, this is undoubtedly the calm before the storm. Cheap corporation tax has been the primary reason behind many non-European multinationals setting up European HQ shop in the Republic. European resentment of Dublin’s intransigence on the maintenance of their undercut tax rate when asking (and indeed, still asking) for bailout money is well known. Sarkozy made thinly veiled comments during the week past. Merkel’s rhetoric leaves little doubt tax rate parity is number 1 on German plans as a price for sorting out the mess. The trouble with politicians is that they all need to get elected again.

Looking further out, there appears little chance of ratification of such a move passing any mandatory RoI referendum. The political risk inherent in an angry southern Europe has been ignored by markets giving the EZ political establishment the benefit of the doubt that any eventual agreement will also be passed through the EU’s tortuous legislative routes.

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