The new Irish government had its baptism of fire in Brussels during an EU summit where a pact was signed that many interpret as the latest attempt by the big boys in the euro area – France and Germany – to promote more central control in the economic and strategic planning of euro area states.

So far, Ireland has been the most vociferous opponent of tax harmonisation in the EU, mainly because it rightly believed that its low corporate tax is a magnet for foreign investment. But beggars cannot be choosers and at present Ireland is begging for some special favours from other euro area states to address two specific problems that can aggravate their already disastrous economic situation.

When lat year Ireland signed the IMF/EU bailout agreement, the rates of interest charged on the loans made was considered by many as being too high to be sustainable in the medium and long term. So, Ireland has requested the European Commission to reduce this rate, just as they intend doing for Greece which is in a very similar position. But Germany and France want something in return for reducing the Irish cost of borrowing.

French Finance Minister Christine Lagarde called for a “gesture” in return for lower bailout costs. German Chancellor Angela Merkel bluntly told journalists after the March 11 meeting in Brussels: “It is simply fair to say we can only give our commitment when we get something in return.”

French President Nicolas Sarkozy was deceivingly gentler when he said: “We are not asking Ireland to put up their corporate taxes to the European average but to make some effort.” No one should doubt that both Germany and France resent the strategy used by some states like Ireland to attract investment by offering lower corporate tax rates.

A second challenge facing the new Irish Taoiseach (Prime Minister) Enda Kenny and his Finance Minister Michael Noonan is the possible implications of the new stress test results for the Irish banks that are now owned by the state. Many are predicting that these results will make a massive increase in capital for these banks inevitable, thereby imposing a new burden on the state coffers. With the Irish national debt already exceeding 100 per cent of GDP, new borrowing to recapitalise the banks may be the last straw that breaks the camel’s bank.

The current Irish government was elected on a clear promise to renegotiate the IMF/EU bailout conditions. They are now in power and are cast in the deep end of European politics facing the heavyweights Angela Merkel and Nicolas Sarkozy. The Irish Prime Minister and his Minister of Finance have again reiterated that they consider their low corporate tax regime as being “out of the question”. They even hinted at using their veto to block any changes on the taxation policies of the EU.

But Merkel and Sarkozy also have to satisfy the aspirations of demands of their local electorate. The French are not really interested in seeing the Irish government earn more through a higher corporate tax regime charged to companies that operate in Ireland. They want to stop the loss of French tax revenue as French companies try to locate to Dublin to take advantage of the tax competition facilities offered there.

Similarly, Merkel has been badly bruised in local elections by a disgruntled German electorate that is fed up with paying for the rescue of countries that then siphon off tax revenues away from the German public coffers.

I don’ think that Ireland, or any other small country, will in the end manage to stop the pressure building up to harmonise tax legislation. It may suit Ireland more to revise its investment strategy and depend less on attractive tax regimes or the exploitation of loopholes in European law to attract foreign investment.

The future of Ireland is in its young people. They already have a very good educational system, even if it now needs a compete revamp to make it once again one of the best in Europe. Ireland also needs to learn to live within its means. The boom years experienced when the property bubble was being blown up by a complacent and incompetent government will never come back.

Ireland and any other country that builds its future on tax incentives that upset much bigger states in the EU may need to rethink their economic planning strategy if they are to prosper.

jcassarwhite@yahoo.com