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And this process
of economic and political integration is now set to go further with the proposed
Treaty that is currently being drafted in the European Convention (see page 16).
Irish corporate tax rates could ultimately be affected.
When Ireland joined the EEC (as it then was), there were two big economic policies:
the Common Agricultural Policy and the common fisheries policy.
In addition, there was a customs tariff free zone. Today, there are many more
common policies, which have had, and are having, a huge impact on the Irish economy.
The main big policies introduced in the 1980s and 1990s were:
EU structural funds to increase the growth rate of
disadvantaged regions
The single market for goods and services in the EU
Free movement of workers throughout the EU,
including recognition of other states' qualifications
EU competition policy
Co-ordination and harmonisation of employment and social policies (not that far
advanced)
Monetary union
Strict limits on national budget deficits (the stability and growth pact)
Moderate amount of coordination of economic and fiscal policies through two EU
laws (the Stability Programmes and the Broad Economic Policy Guidelines).
Monetary union and the associated budget deficit rules and close monitoring of
fiscal policy make a big difference to the Irish economy. In the last few years,
it has undoubtedly given us much lower interest rates than we would have otherwise
had and this contributed to the exceptional scale of the economic boom (and to
high house prices). The Irish government's room for policy manoeuvre has been
greatly restricted.
But the single market has also had a huge impact. Many companies like Ryanair
would not exist today if it wasn't for the rules of the single market, which ensure
that companies in almost all sectors of a member state economy are free to compete
in other member states on equal terms with companies based in those states.
The European Convention is pursuing two broad themes as regards economic policy.
It is considering whether, and possibly how, to re-organise or to legislate for
existing areas of policy coordination, which in the opinion of some commentators
could be improved. Therefore, the convention working group on "economic governance"
in the EU is examining existing procedures like the Broad Economic Policy Guidelines
(BEPG) and the procedures and policy objectives of the European Central Bank (ECB).
The main area that is proposed for further change and/or policy integration at
present is fiscal policy, including corporation tax. The EU Commission has proposed
that there should be some relaxation of the Stability and Growth Pact, which restricts
individual states' scope to have budget deficits. At present, member states (those
that participate in monetary union) must aim for a balanced budget over the medium
term and must never have a budget deficit more than 3% of GDP. The main proposal
is that member states with relatively low national debts (like Ireland) would
not have to aim for a balanced budget for a period of years. This would have the
aggregate effect of giving more fiscal stimulus to the European economy.
There is a very strong political current to have greater coordination of taxation
policies and, especially, corporate taxes, mainly to stop individual states from
having excessively low corporate taxes. Most member states support such a change,
especially in view of the forthcoming enlargement to 25 states. To allow greater
coordination of corporate taxes, the current argument is to abandon the unanimity
requirement on taxation matters in the EU Council of Ministers and instead have
qualified majority voting. The Irish Government strongly opposes this and is currently
supported by the UK and one or two other states. The Irish Government fears losing
some of the multinationals in Ireland if it is forced to increase the corporate
tax rate, even though it would get more tax revenue.
There is a greater level of disagreement concerning "economic governance"
than in most subject areas in the European Convention. It appears that the Convention
is shaping up for a big bargaining process. Inevitably, many strongly held positions
will have to be compromised in the process and it is not at all clear that the
Irish Government will succeed in maintaining unanimity on taxation matters or
avoid some process of harmonisation of corporate taxation.
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