At first glance some will rail at the fact that non-euro country, the UK, is contributing to the Irish bailout. But actually, the deal between Ireland and the various bodies that are due to lend it money, seems to consist of a far more worrying condition: the imposition of a property tax.
First things first: the UK’s contribution to the Irish bailout is justified because if Ireland defaulted and its banks went bust, the UK would suffer. Ireland is, after all, one of the UK’s main trading partners. (It’s ridiculous, of course, but Britain sells more to Ireland, than it does to China and India combined). So if the Irish economic crisis became worse, the effect on UK exports would be pretty worrisome. Some UK banks, in particular RBS which is primarily owned by British taxpayers, hold an awful lot of assets pertaining to Irish banks on their books. If Irish banks went the way of Lehman, we would have another major banking crisis on our hands.
But the worry lies in part in how Ireland must pay its way, in the conditions to be imposed on the country.
Corporate tax is not going up. The Germans and the French don’t like it, but this was why the Irish government played hardball and said it didn’t want bailing out. If Ireland went bust it would be just as big a catastrophe for the eurozone as it would be for Ireland. So her governments says, Thanks, we will have your money, but not at the price of upping corporate tax.
But one condition that does seem likely to be imposed on Ireland is a new property tax.
Now, under normal circumstances property taxes might be quite a good idea. The economist Fred Harrison has argued that most economic bubbles are caused by housing bubbles, and the way to stop them occurring is to introduce property taxes.
But Ireland’s fundamental problem right now is crashing house prices. If Irish house prices were higher, its banks would not be so vulnerable. It’s the same in Portugal and Spain, and to a lesser extent the UK.
A property tax before the crisis would have been a good idea.
But right now, such a tax could be very bad news indeed.
An Irish property tax would not merely be akin to locking the stable door after the horse has bolted; it would be the equivalent of locking the door so tight that once the horse has been recovered, no one can work out how to get it back in.
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