There have been heated exchanges between the government and opposition parties since Michael Noonan, the finance minister, announced that he would sell off 25 per cent of AIB to private investors.
Brendan Howlin, leader of the Labour Party, passed a bill through the Dáil calling for the sale to be delayed until the government had secured a derogation from EU fiscal rules. As it stands, the expected €3 billion must be used to pay down debt. However, Mr Howlin wants the money to be used for capital projects. The proposed sale is in the programme for government so does not need Dáil consent.
Pearse Doherty, a Sinn Féin TD, has questioned why the government is selling the stake, arguing that it is a lucrative asset that should remain in state hands.
There is a lot more merit in the Mr Howlin’s position.
There are several bottlenecks in the economy and unless they are addressed they will constrain growth in the short, medium and long term. Nowhere is the infrastructure deficit more visible than in the housing market, where there is a chronic shortage of supply.
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According to EU fiscal rules any windfall revenues, such as the sale of a state asset, must be used to pay down debt. Ireland may get a derogation from this rule as part of the Brexit negotiations but that will probably take several years.
A much more effective way of ramping up investment in the short term is to remove the government’s self-imposed cap on the amount of infrastructure projects carried out through public private partnerships, which is 10 per cent.
The European Commission launched a €700 billion investment plan last year and EU sources said that they were disappointed with the submissions from the Irish government, which were described as “lacking ambition”. The government must look at funding as much infrastructure investment as possible through this channel.
Mr Doherty said this week that some of the safest banks in the world were in state ownership. It should be noted that some of the worst banks in the world are also under state ownership and some of the safest banks in the world are in private ownership.
The key question is: what is best for the Irish economy? There is already the Irish Strategic Investment Fund, which acts as a state bank in providing low-cost funding.
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Owning a bank is a risky proposition. Under the EU banking union, regulation has been transferred to the single supervisory mechanism based in Frankfurt. According to new bail-in rules, investors must absorb the losses if a bank collapses. If it is state owned that means the taxpayer.
There is a mountain of evidence to show that banks that are subject to a high level of political interference tend to be less efficient and less profitable. What the economy needs more than anything is a well regulated competitive banking sector. That is not going to happen if one of the two pillar banks is in state ownership.
Returning AIB to the private fold is the only way to ensure that the full €21 billion of taxpayers’ money used to rescue the bank is recouped.
Troubled union
In an interview with this newspaper published today, Mr Noonan says he has mixed feelings about the European Commission’s paper, released this week, on the future of the eurozone.
The commission said that the completion of a banking union and a capital markets union should be in place by 2019. The minister says he fully supports both of these aims. He is right to do so.
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A capital markets union would be hugely beneficial to the eurozone economy. In the US, companies raise about 85 per cent of their funding needs from capital markets. In the eurozone, however, they draw more than 80 per cent of their financing from banks.
A liquid capital market is a much better model for the economy. It reduces funding costs, makes financing more widely available and is less risky than bank lending.
Mr Noonan correctly points out that the commission’s medium-term objectives are more problematic for Ireland. The paper suggests that between 2020 and 2025 the eurozone should consider setting up a treasury for member states, with a common finance minister and much closer fiscal integration. It suggests pooling risk through a “European safe asset”, which would involve the common issuance of debt.
Ireland has consistently rejected moves towards closer fiscal integration. The country’s 12.5 per cent corporate tax rate has been extremely successful in attracting foreign direct investment but has long been a source of grievance among some EU member states, who see it as fostering unfair tax competition and promoting a race to the bottom. Proposals for fiscal union include a harmonisation of rules on how corporate taxes are calculated. A common consolidated corporate tax base could potentially halve Irish corporate tax revenues.
Mr Noonan says Ireland must build alliances with like-minded EU member states as a blocking move against attempts to introduce tax policies that are harmful to Ireland.
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If a revitalised Franco-German axis under Emmanuel Macron, the French president, and Angela Merkel, the German chancellor, can come to a common position on fiscal policy, it is only a matter of time before it is introduced.
The government must reduce the economy’s reliance on the 12.5 per cent rate by developing a much more sophisticated corporate tax regime. This should include greater incentives for research and development and other higher value-added activities. It also means building up the domestic corporate sector, which is likely to be less sensitive to changes in tax policy.