Cantonal eyes smiling at Irish economic woes

Dublin: How bad could things get for Ireland?

With Ireland coming under increasing pressure to raise corporate taxes, Swiss cantons are eyeing the opportunity of seizing a greater share of company relocations.

The debt-stricken republic has rejected calls from France and Germany to increase company income tax in return for a European Union bail-out, but some believe the former Celtic Tiger may have lost too many teeth to resist.

Ireland’s current economic woes spring from the dramatic collapse of its housing market since 2008, landing its banks with bad debt. A government bank bail-out left holes in national accounts and the country in need of an emergency cash injection.

Irish and EU leaders are currently thrashing out the terms of a Greek-style bail-out that is estimated to require tens of billions of euros. The details of these talks are expected to be announced early next week.

Some elements within the EU have long criticised Ireland’s low corporate income tax rate of 12.5 per cent that has had the effect of poaching companies from other member states.

An unnamed French official told the Financial Times newspaper that this was “almost predatory”.

Swiss winning race

Olli Rehn, EU commissioner of economics and monetary affairs, has also questioned the tax regime in light of the proposed bail-out. “Ireland is not going to be a low tax country in the coming decade,” he recently stated.

While Irish deputy prime minister Mary Coughlan has called the continuation of low tax rates “non negotiable”, Ireland does not appear to have much room to manoeuvre.

Ireland competes head-on with Swiss cantons to entice foreign companies to set up regional headquarters or business units within their borders. Four years ago, Switzerland lost out to Ireland in the race to host a production unit of biotech giant Amgen.

But Marc Rudolph, of the business promotion agency Greater Zurich Area, believes the Irish threat had already reduced in recent times. He pointed out the decision of Google to build up its regional research and development centre in Zurich despite having its European HQ in Dublin.

“Ten years ago Ireland, along with the Netherlands, was our main competitor,” Rudolf told swissinfo.ch. “But Ireland’s problems in the last two years means that it is not so high on the list now.”

Irish firms worried

Swiss cantons have embarked in a constant round of corporate tax rate cuts in the past few years in an effort to attract firms and boost revenues. Lucerne this year reduced its combined cantonal and federal taxes from 19 per cent to 14 per cent and aims to have the lowest rate from 2012 of 12.1 per cent.

Patrik Wermelinger, head of promotions and marketing at the Lucerne Business Development agency, said he had received a “handful” of calls and one personal visit from worried Irish-based firms in the past two months.

“They are worried about the general uncertainty of the economic situation in Ireland,” he told swissinfo.ch. “They don’t know how this mess can be solved and fear the business community might be asked to shoulder additional costs.”

“They are looking for a safe place to move to and Switzerland offers a very stable economic and political environment,” he added.

Andreas Staubli, head of tax advice at PricewaterhouseCoopers Switzerland, also said the firm had received some enquiries.

“Clients have said that if corporate taxes go up by two or three per cent then they would consider moving out of Switzerland,” he said. “Ireland is a remote area compared to Switzerland and a tax rise would clearly be a big disadvantage.”

Small bank exposure

But while Swiss cantons may rejoice at Ireland’s difficulties, exporters and the tourism industry may have less reason to find cheer if the euro depreciates further against the franc.

The euro is holding steady at around SFr1.37 while bail-out negotiations take place, but could take a dip even if they prove successful.

“This will probably lead to further appreciation of the Swiss franc against the euro,” Jan-Egbert Sturm of the KOF Swiss Economic Institute, told swisinfo.ch. “The question is whether this will stop at Ireland or if Portugal, Italy and Spain are next. Such uncertainty usually leads to a flight to the safety of the stable franc.”

“In absolute terms this would negatively affect the Swiss market, but we should not forget that in relative terms Switzerland is doing much better than other European countries,” he added, citing the strengthening position of exporters in Asia, the enhanced reputation of Swiss financial stability and the increased attractiveness of Switzerland to highly skilled workers.

Swiss banks are not significantly exposed to Irish counterparts, according to the latest Swiss National Bank data.

In 2009 Swiss banks had just over SFr11 billion ($11.06 billion) of assets parked in Ireland (against a total foreign distribution of SFr1.4 trillion), with claims against Irish banks making up just SFr2.9 billion of that total.

UBS and Credit Suisse hold most of the SFr10.4 billion of liabilities in Ireland (SFr1.33 trillion global total), with SFr3.8 billion owed to Irish banks.

Irish economic woes

Once called the Celtic Tiger for its rapid rags to riches economic boom story, Ireland now finds itself on the verge of receiving an EU bail-out to save the country from ruin.

The roots of Ireland’s current difficulties lie in an over-inflated housing market that toppled in the aftermath of the 2008 financial crisis.

The Irish government created an €81 billion (SFr110 billion) fund to swallow up banks’ bad debts and partially nationalised the Allied Irish Banks and the Bank of Ireland.

But the combined €45 billion bail-out has been criticised for being too little, too late – and has ruined state finances into the bargain.

With the Irish government struggling to pay its bills, the cost to the state of borrowing money has risen to unacceptable levels.

Ireland insisted that it did not need an EU bail-out until Thursday, November 18, when it admitted defeat and started negotiations for a cash injection that could reach €80 billion.

Ireland is not the first country to go knocking at the EU’s door for money. Earlier this year, Greece was given a €110 billion, three year loan, from a central EU fund.

Greece was forced to adopt severe austerity measures – slashing public funding and cracking down on corruption –to get the bail-out.

As the Irish bail-out negotiations are carried out, France and Germany are leading calls for Ireland to raise revenues by increasing corporate tax rates.

The finances of other countries, notably Portugal, Italy and Spain, also look shaky with many observers predicting more bail-outs to follow.

The effects of such problems have dampened EU GDP growth and put huge pressure on the euro, which has fallen dramatically against the franc.