'Solidarity is not a one-way street" was the stern reminder from Germany's deputy finance minister, Steffen Kampeter, when the Bundestag approved Ireland's request to refinance most of its International Monetary Fund (IMF) borrowings. The State hopes to benefit from record low interest rates in order to repay early €18 billion of its €22.5 billion IMF loan, and thereby to reduce its annual debt interest costs. The IMF loan, at a 4.99 per cent rate of interest is seen as overpriced relative to current – much lower – market rates. Last week, the National Treasury Management Agency easily raised €1 billion in 10 year borrowings at a cost of 1.63 per cent.
Germany’s approval of Ireland’s request was, as Mr Kampeter made clear, a qualified one. It is seeking two concessions in return. One requires the Government to close tax loopholes that help multinational companies to minimise their corporate tax bills. Another requires the Government to use the money saved by the loan adjustment (an estimated €400 million annually) to cut the public debt – not to finance tax cuts.
Under Ireland's bailout agreement with the troika of international lenders, any early loan repayment must be made to all lenders, not just one – the IMF. And to change those rules requires all EU member states to agree. Germany matters, given its leadership role in the EU and its capacity to influence how other countries may respond to Ireland's request. Undoubtedly, the Government will welcome Germany's support. But it will also worry about the conditions attached, lest other countries follow Germany's example, and set similar – or other – terms as the price of their assent.
Ahead of next week’s Budget, it is now clear that the Government is facing ever-greater pressure to clarify its position on reform of corporate tax law, not least Ireland’s tax residency provisions. Solidarity, as Mr Noonan has been publicly reminded, is not a one-way street.
It is clear that wider pressures on Ireland are also building in relation to corporation tax. The EU Commission has threatened to start a probe into the controversial double Irish tax regime, if it is not abolished. Germany – and the EU Commission – know that many other countries also have tax structures which facilitate tax avoidance. US tax rules are also a key factor. To this extent the focus on Ireland and the demand for conditionality from Germany is overplayed. Remember, also, that the money was borrowed from the EU and IMF in part to repay bank bondholders and protect the European banking system.
That said, it is clear that the days of the double Irish tax structure need to be ended. Strategically, it is time for Ireland to do this. Fortunately, it looks as if Minister Michael Noonan will indeed close off the relief in Tuesday's Budget.