Euro slump and corporate taxes drive Coalition’s re-election plan

If the Coalition were to secure a second term following the looming general election, it would achieve what other centre-right dominated administrations on the troubled eurozone periphery have failed to do.

Spain and Portugal also needed to tap international aid during the crisis, and their governing parties sat with Enda Kenny’s Fine Gael as members of the European People’s Party.

However, EPP leaders of countries hit hard by the debt crisis and which emerged from their versions of bailout programmes have, in recent elections, either fallen short or lost out altogether.

If Mr Kenny were to return to head up a new government, he will have two extraordinarily favourable economic factors to thank.

The first had its roots back when Europe was finally getting a grip on its worst ever debt crisis.

In his “candid and frank enough” 2012 speech in London, Mario Draghi, then only recently installed as the Italian boss of the ECB, famously pledged the central bank would be “ready to do whatever it takes” to save the eurozone from a breakup.

Under the disastrous leadership of Jean-Claude Trichet, the ECB had been fire-fighting so long that it is sometimes now easily forgotten how close the eurozone came in its dance with disaster.

Of course, the Taoiseach was caught out in October over-egging a speech to an international audience, claiming advisers had contemplated putting the army on standby to protect ATMs from the potential threat of the Wild Irish, as the crisis deepened. But the threat of a breakup of the eurozone and all the costs that would have entailed were very real, even if Mr Kenny was mixing up Europe’s and Ireland’s many recent economic crises.

In late 2011, the Wall Street Journal reported a number of eurozone central banks had made contingency plans for the breakup of the bloc. It went further to say that at least one — namely the Central Bank of Ireland — had, at the time, evaluated whether it needed additional access to printing presses in case it had to churn out new bank notes to support a reborn national currency.

Along with Portugal, Greece, Spain, and Italy, it appears Ireland was destined for the eurozone exit, to start a new life with a devalued ‘punt nua’ within some new loose Exchange Rate Mechanism.

With the crisis abating, Mr Draghi’s ECB finally got around to doing something concrete about the legacy of Europe’s crash when it sanctioned last year massive waves of eurozone bond buying, years after the central banks in the US and the UK had saved their economies by the same means.

The ECB famously does not do growth or employment targets and, supposedly, does not have currency targets. It has a narrow remit — keeping an inflation target ticking over.

But despite the pretence, its belated quantitative easing programme led to a dramatic plunge in the euro.

By accident, Ireland had suddenly got a devaluation, without exiting the euro, securing a long-craved competitive exchange rate against the dollar and sterling.

The unique nature of the exports-focused Irish economy meant the slump in the euro benefited this country more than almost anywhere in the eurozone.

The weak euro pumped up profits of the many large multinationals based here. The corporate behemoths paid more tax here, and billions of euro in unanticipated receipts filled the exchequer’s coffers. This bounty provided the Coalition with an amazing opportunity for pre-election largesse.

As the Irish Examiner detailed at the time, the Coalition delivered the tax bounty by way of a master stroke. Just days before announcing his 2016 Budget, Finance Minister Michael Noonan splurged an extra €1.5bn of expenditure on health, transport, and social welfare, and all of the loot to be spent in the last few weeks of 2015.

In an instant, the 2015 deficit of €600m in the health budget was closed, and other voter-friendly measures were funded. 

The Government and the Central Bank had in the past hailed renegotiating the promissory note with the ECB — an agreement clinched three years ago next month — as the turning point in Ireland’s debt fortunes. This was always a dubious claim.

Another way of looking at that accord was that the annual repayment on the note of around €3bn for 10 years would have been broken the Irish economy. The agreement needed to be done anyway.

Last year’s slump in the euro and the unexpected corporate tax bounty that it bequeathed have done more than anything to bolster the Coalition’s re-election bid.


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