The corporation tax debate misses the crucial point about EU financial co-ordination, writes Ronan McCrea.
As the EU Commission plans to take France and Germany to court for their failure to adhere to the Growth and Stability Pact, the Irish Government has been busy reiterating its determination, despite calls from the Irish Congress of Trade Unions, to "die in the ditches" defending of our national veto over any attempts to harmonise taxation at EU level.
However, the focus on issues such as corporation tax and the stability pact by political leaders across the Union represents a failure to face up to the reality of the consequences of the formation of a single monetary area across the euro zone. The fact is that irrespective of the outcome of the struggle on these issues, the system set up on the launch of the euro in 1999 is not sustainable under current political and economic arrangements.
The Government has very good reasons to seek to protect our low rate of corporation tax which has been a major reason for the economic growth of recent times. Indeed, the flagrant nature of the disregard of the terms of the stability pact by the German and French governments will only have encouraged such an attitude, showing as it does the potential for larger member-states to ignore the concerns of smaller countries and to play fast and loose with the rules when it suits them to do so.
Our perhaps justifiable suspicion cannot, however, insulate us from the fact that the creation of a single currency will inevitably require a degree of harmonisation of fiscal policy within the euro zone.
Governments have traditionally used interest policy and budgetary policy to pump up a slow economy and to deflate a booming one. The adoption of the euro meant that a single interest rate would be applied to the entire euro zone irrespective of the differing requirements of th each participating country's economy, and that individual governments would lose the ability to manage their economies in this way.
It was inevitable that the rate chosen would be too low for some countries and too high for others. Ironically, due mainly to German fears of Mediterranean profligacy, a stability pact limiting the permissible budget deficit to 3 per cent of GDP was agreed on, with financial penalties for those who breached its terms.
As the German government rightly points out, dealing with high unemployment, weak growth and saddled with an interest rate too high for these circumstances it has little option but to break the 3 per cent limit. The problem lies not with the adoption of the euro itself but with the unwillingness of European leaders to level with their populations as to the consequences of having done so.
The United States is a currency union of some 50 states with widely divergent economic interests yet it can accommodate these differences because of the greater mobility of labour between states but also because of the role played by the federal government. When there is a recession in California the amount of tax it pays to the central government declines as incomes fall and the amount of money it receives rises as greater numbers of Californians receive unemployment and other assistance.
These "fiscal stabilisers" transfer money from booming to struggling areas and help to make up for the inability of a centrally set interest rate to accommodate local conditions. As such they are a prerequisite of a successful monetary union.
In the EU the equivalent of the federal budget (the EU budget) is limited to 1.27 per cent of GDP, almost half of which goes on wasteful agricultural subsidies. Such a figure is far too small to make an appreciable impact on economic cycles in any but the smallest member-states.
If the euro is not to end up subjecting its members to prolonged and unnecessary recessions, the "federal" (i.e. central EU budget) needs to be significantly increased and to operate in a very different way. The fact that in the aftermath of the failure to agree a new constitution several member-states actually proposed a decrease in the size of the budget shows the degree to which European politicians have not come to terms with the reality of living in a monetary union.
This does not mean that the Irish Government will have to give up its resistance to harmonisation of corporation tax levels. It does, however, mean that our leaders, like those in our fellow member-states, will have to face reality and explain to Europe's citizens that a single monetary policy for 12 countries will not be able to function without any significant harmonisation of the fiscal policies of those countries.
The loss of sovereignty involved need not be as frightening as it may appear. The Union could, for example, raise a relatively small income tax which would be used to fund the first €30 or so of unemployment benefit, with the member-state government paying the balance.
There will be many for whom the idea of greater tax-raising powers for the Union is an anathema. The consequences of not providing such powers have, however, been plain to see since the launch of the currency, when the governments of booming Ireland and sclerotic Germany struggled to cope with an interest rate that was too low for us but too high for them.
Unfortunately, there has as yet been no indication that Europe's leaders are willing to take the tough decisions necessary to address this problem. Indeed, budgetary questions appear to have become something of a pawn in the wider recriminations game following the failure of the Brussels Inter-Governmental Conference, with a coalition of eurosceptic and net-contributor states seeking to reduce the EU budget by almost 20 per cent.
While such an approach would meet the immediate desire of some states to punish Polish intransigence and may even marginally ease Germany's budgetary position, a failure to address the wider structural deficiencies in the fiscal apparatus of the euro zone will have far-reaching and possibly fatal consequences for the euro project.
It is certainly true that it was not made clear to the voters at the time of the Maastricht referendum that a single currency, then still a distant dream, would require further unification in areas as sensitive as national fiscal policy. However, this has been the story of European integration from day one, as unity in one area inevitably spilled over into others.
As it is currently constructed, the imbalance between the total monetary and very limited budgetary unity in the euro zone is hurting the EU's citizens. The euro still represents a fantastic economic and political opportunity for Ireland and Europe. However, our leaders need, belatedly, to be honest with us about the consequences of what we have done, and to have the courage to do what is needed to make the most of this opportunity.
Ronan McCrea is a trainee barrister at Matrix Chambers in London. He has an M.Sc. in EU Politics and Policy from the London School of Economics.