Why Ireland Resisted The Bailout

Why was cash-strapped Ireland so shy about taking aid from the European Union last week? As talk swelled of a bailout, the Irish government insisted that it had no immediate need for aid—this, despite heavy pressure from the bond markets and European governments that feared the impact of Ireland's woes on the euro. The official answer was that tight conditions attached to any loan would undermine Ireland's independence. In the words of Enterprise Minister Batt O'Keeffe: "It has been a very hard-won sovereignty for this country, and the government is not going to give over that sovereignty to anyone."

But the issue goes far beyond mere nationalistic pride. What also worried the Dublin government was that its EU partners might put pressure on Ireland to raise its corporate tax rate, now the lowest of any major country in Europe at 12.5 percent. Such generous treatment has helped pull in big-name multinationals including Pfizer, Google, and Intel, which underpinned the "Celtic tiger" boom. At present, foreign investors provide some 236,000 Irish jobs, directly or indirectly—more than 10 percent of the total labor force—and account for half of all Ireland's corporate tax revenues.

Naturally, the more lax Irish tax regime has irked other European states burdened with higher rates that deter international business. (In Germany, the corporate tax rate is 30 percent, while Britain's is 28 percent.) Now Ireland's plight could be their opportunity. "It's a fact of life that after what has happened, Ireland will not continue as a low-tax country," said Olli Rehn, the EU's economic-affairs commissioner, last month. "Rather it will become a normal tax country in the European context."

But it's unlikely the Irish will be easily persuaded to raise their rates. Any hike in the corporate tax would be counterproductive, says John Fitz Gerald of the Economic and Social Research Institute in Dublin. "The big issue has to be whether Europe really wants to sort out the Irish economy or not, and the effect of a [tax rate] rise in the short term would be that the Irish economy [does] worse, not better." In other words, if Europe wants a strong Ireland and a secure euro, keeping taxes low could be a minimal price to pay.