Ireland bailoutIreland's shaky finances may find more solid footing as the country formally seeks a bailout from the European Union. And markets are likely to react positively to the development.

But investors should stay focused on the dynamics within European politics that shaped the rescue deal. Plenty of other overly indebted economies -- like Spain, Portugal and Italy -- could find themselves in a similar situation, after all. And similar considerations will again guide market moves.

For example, a brief showdown over Ireland's ultra-low corporate tax rate of 12.5% turned into a contentious issue. Other EU countries have long resented the advantage that Dublin's tax policy gives it in attracting capital and letting it thwart broader EU directives. Ireland had feared that an aid package would be used as leverage to force it to raise corporate tax rates. The country remained skittish about asking for aid even as its banking sector faced mounting pressure.

France vs. Germany


But French President Nicholas Sarkozy paved the way for a bailout over the weekend. Facing up to its deficits, Ireland may consider raising corporate taxes. "But that's not a demand or a condition, just an opinion," Sarkozy said. That stands in stark contrast to a hard line taken by EU Economic and Monetary Affairs Commissioner Ollie Rehn, who had previously declared that "Ireland will not continue as a low- tax country."

France, of course, rivals Germany as a core Continental economic power. And France has frequently sided with struggling European economies against more stringent measures proposed by Germany. That has allowed France to gain influence within the EU, and its tendency to play white knight may only increase as the juggernaut German economy continues to gain momentum.

German politicians, on the other hand, are trying to score points with domestic voters who are increasingly displeased by what they see as their picking up the slack for Germany's profligate neighbors. Domestic considerations played a major role in Germany's summer showdown with Greece, says Marko Papic, Eurasia Analyst at global intelligence firm Stratfor.

Adding to the Turmoil?

Over the summer, Chancellor Angela Merkel's Christian Democratic Union party suffered major losses because of voter resentment about the Greek bailouts, among other issues. Germany is again gearing up for a series of major elections in the spring of 2011, Papic notes. That means domestic political considerations may once again form the backdrop of European bailout negotiations.

Merkel's comments at the end of October pushing for binding crisis-management rules that include debt restructuring set the stage for rattled markets. Her remarks drew massive fire from other EU heads who felt that her demands for formal changes at a sensitive juncture only added to the turmoil on the Continent.

As German elections approach at the start of next year, the political landscape will heat up. Politicians will face growing incentives to dial up the rhetoric and point fingers at debt-burdened neighbors. Much like they needed to do with Greece and now Ireland, investors will need to keep an eye on political posturing as well as the financial situation.

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Robert & Lisa

With commodity prices having surged over 50% in the past year and unemployment at almost 10%, we obviously have a deep recession with inflation just like the Jimmy Carter years. Ronald Reagan's policies pulled us our of the abyss then, who will do it now? Obama and thugs seem hell bent on keeping us in the abyss.

November 22 2010 at 6:29 PM Report abuse +2 rate up rate down Reply
bmasona

It will be many years before we get a handle on this debt. The middle class is slipping further down along with less pay for more work. Mostly the rich remain untouched. Immigration is not being enforced. Along with immigration comes a great many people with little or no education. Who in the end will be on the backs of the middle class or what is left of it. The wider the gap grows between the rich and the rest of us the greater our problems will become.

November 22 2010 at 1:36 PM Report abuse +2 rate up rate down Reply
1 reply to bmasona's comment
Robert & Lisa

Thanks Obama and thugs.

November 22 2010 at 6:31 PM Report abuse rate up rate down Reply
saltnpepper1946

The EU has really only 4 countries that powers the union economically. Those are Germany, the Netherlands, Belgium and Luxembourg. Their contributions exceed by far those of the other EU members.

November 22 2010 at 12:01 PM Report abuse rate up rate down Reply
donut999

so the question is---when and where does it end? no matter the currency, when does it become board game money? when is everybody, and every country broke?

November 22 2010 at 11:50 AM Report abuse +2 rate up rate down Reply
1 reply to donut999's comment
Robert & Lisa

As long as the socialists and communists reign, countries will continue to go broke. Obama and thugs strike again.

November 22 2010 at 6:36 PM Report abuse rate up rate down Reply
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November 22 2010 at 11:20 AM Report abuse rate up rate down Reply