Corporate rate not such a taxing problem for France

ANALYSIS:Ireland's defence of its tax rate may play well at home, but it is not arguing the case well with its French partners

AS AN insight into the strange game of diplomatic charades being played out over the fate of Ireland’s corporate tax rate, the signals from Dublin, Paris and Berlin over the past week were worth a close reading.

In the Dáil on Wednesday, Taoiseach Enda Kenny announced that Ireland was now trimming its goal for a reduced interest rate on its bailout loans. Presumably referring to France’s insistence that a lower interest rate be contingent on Ireland raising its corporate tax rate, he lamented that it was “unfair” for some countries to impose their own conditions and that the interest rate cut was being “allowed to drag because of national issues”.

Minister for Finance Michael Noonan struck a similar note of pessimism, suggesting “too much is being made of” the reduction anyway.

Considering the Government’s aggressive stance on the rate until then, the defeatism was a striking shift in tone. All the more so since the impression from Paris and Berlin in recent days has been that a deal is still possible.

At the Élysée Palace, government spokesman François Baroin said that while France “eventually” wanted to see harmonisation of taxes in the EU, it was willing to take into account the “singular situation” of countries such as Ireland. In Berlin, a government spokesman said of the noises from Ireland: “People are barking at something that isn’t there.”

That the protagonists in the interest rate debate still appear to be speaking at cross purposes is a measure of the impasse.

Since the Government took office in March, serious efforts have been made to press the Irish case on corporate tax. Background lobbying has taken place, influential French journalists have been briefed and recent ministerial visits to Paris have been used to make Ireland’s case to senior French ministers known to have President Nicolas Sarkozy’s ear.

But neither Paris nor Dublin have played a flawless strategic game. While adopting an aggressive posture against Sarkozy’s supposed belligerence – exemplified by Dublin’s enthusiastic briefing about the row between Kenny and Sarkozy in Brussels in March – plays well to a domestic audience, it’s quite a risky strategy for a small, weak country to adopt against one of the most powerful men in Europe.

It also whips up public hostility towards a country whose goodwill Ireland badly needs. Hearing serious people in Ireland talk about a boycott of French products would be funny if not for the fact that France is one of the biggest markets in the world for Irish exports and tourism (the balance of the huge bilateral trade is about two to one in Ireland’s favour).

Irish public indignation is also fed by a simplistic assumption that Paris’s stance is down to two things: Sarkozy’s personal pique and his domestic electoral calculations. Neither is quite true.

Sarkozy can be stubborn, yes, but his position is consistent with long-held French thinking about the distortive effects of different tax rates in the single market and the moral dubiousness of making ordinary people pay higher taxes to help cut deficits while asking large companies to shoulder no extra burden. One can take issue with these arguments, but just because they offend Irish sensibilities doesn’t mean they need not be taken seriously or confronted on their own terms.

The electoral benefit Sarkozy gains from attacking Irish tax is overestimated. Attitudes to the issue are mixed in his UMP party, and it’s not a topic that excites his base like it would the Socialist Party’s. Outside the financial press, the Irish interest rate debate barely registers here. That’s not to say that Sarkozy is not acting out of self-interest. He has done everything to make France more competitive in attracting foreign firms – everything short of reducing the tax rate, that is. No French government could be seen to lower taxes on business while so many ordinary people are suffering, but a common European rate set by Brussels would provide political cover for domestic reform.

The stand-off between Dublin and Paris is made more curious by the lack of direct dialogue at the highest levels of both governments. “We’re waiting for the Irish to come to us,” a senior Élysée Palace official told me earlier this year. He could well have meant it literally, as it will not have gone unnoticed that Kenny has not come to Paris to speak directly with Sarkozy since becoming Taoiseach (Kenny’s office declined to say, in response to a question from The Irish Times, whether he has spoken to the French president by phone).

As anyone who knows about Sarkozy is aware, he likes to deal directly with foreign leaders. His first response when faced with a problem is invariably to call a meeting or a summit. Above all, he is a pragmatist who retains a lawyer’s relish for striking a deal. And he too needs a way out of this impasse, knowing that Ireland would find it difficult to concede on corporate tax and that, as a piece in Le Monde warned recently, that this “useless and dangerous confrontation” risks provoking further hostility towards Europe among the Irish public.

All of this could work to Ireland’s advantage. So too should the fact that Sarkozy, unlike German chancellor Angela Merkel, is not under any great domestic pressure to be tough on Ireland. A recent opinion poll found that 59 per cent of French people supported the idea of France coming to the aid of struggling European neighbours.

Of all the cliches Ireland invented for itself during the boom, one that the French remember best is the Boston v Berlin dichotomy. It speaks to quite a strong feeling here – I have heard it from shopkeepers and top officials – that Ireland chose an Anglo-Saxon model and mistakenly turned its back on lessons it might learn from supposedly inert continentals. It’s not the most textured analysis, and yet the corporate tax debate has succeeded in reinforcing it, by exposing the gaps in understanding between Ireland, Paris and Berlin when the importance of these relationships is more apparent than ever.

Ruadhan Mac Cormaic is Paris Correspondent