* Merkel digs in on private investor involvement
* Says politicians must prevail over markets
* Govt official: will not impose demands on corporate tax
(Adds analyst, German official on Irish tax)
By Stephen Brown
BERLIN, Nov 24 (Reuters) - German Chancellor Angela Merkel said on Wednesday European politicians needed the courage to make private investors share in the risk of future debt crises in the euro zone and show financial markets who is in charge.
"Have politicians got the courage to make those who earn money share in the risk as well? Or is dealing in government debt the only business in the world economy that involves no risk?" Merkel said in a speech to the German parliament.
"This is about the primacy of politics, this is about the limits of the markets," said the chancellor, acknowledging that her insistence on this issue was making markets nervous.
The centre-right German leader is blamed by some in Europe for provoking the recent Irish debt sell-off by saying private euro-zone bondholders must be made to share the risk of future sovereign debt crises via a permanent euro crisis mechanism.
She sparked fresh selling of the euro on Tuesday by saying it was in an "exceptionally serious" situation.
This prompted one European Central Bank policymaker, Ewald Nowotny, to voice irritation at Merkel for not "differentiating between the euro as a currency and the problems of individual (eurozone) states".
The euro hit a two-month low against the dollar on Wednesday on renewed concerns about Ireland's debt plans.
An Irish downgrade by Standard and Poor's pushed the Irish bond spread against safe-haven German debt even higher while the premium which investors demand for holding debt in Portugal and Spain debt hit new highs as contagion fears grew.
INVESTORS TO FACE HAIRCUTS
Merkel has repeatedly said private investors must be involved in a new euro zone crisis mechanism for the euro zone to take effect from mid-2013, when the current mechanism lapses.
A German government paper seen by Reuters, which Berlin wants to serve as the basis for discussion in Brussels, proposed that private investors should face "haircuts" or other debt payment restructuring measures.
Berlin wants creditors like banks and financial investors to be drawn in by attaching collective action clauses (CACs) to all newly issued euro zone bonds from as early as 2011 in order to ensure a smooth transition to 2013.
The proposal will be discussed by EU leaders in mid-December but some leaders may be concerned that introducing such clauses so soon could unnerve bond markets even further.
But Carsten Brzeski, an economist with ING Financial Markets, said he believed "markets are getting used to the idea that the private sector also has to pay part of the bill and right now it's simply a matter of giving facts".
The new mechanism would succeed the European Financial Stability Facility (EFSF), a safety net created after Greece's debt crisis rocked the euro zone earlier this year. Merkel said she had a "positive" view on Ireland taking up this mechanism.
She faced loud criticism for delaying an aid package for Greece while insisting on deeper austerity measures, finally agreeing to it days before signing up to the much bigger EFSF.
Merkel has said repeatedly that "the best European" is not necessary the one who helps other member countries first, but who takes action to strengthen the euro longer-term.
IRISH TAX LOBBY GROWS
Support grew in Germany's ruling coalition for a possible link between aid for Ireland and a cut in its low corporate tax rate. The lowest in the European Union at 12.5 percent, it has been a magnet for foreign investment in Ireland.
Some Germany politicians -- now echoed by others in Europe -- say Ireland should demonstrate that it is taking all possible fiscal measures to cut its deficit and boost earnings, including by scrapping a tax advantage over other EU member states.
"Ireland cannot remain a tax oasis," said the state finance minister of Bavaria, Georg Fahrenschon from Merkel's Christian Social Union allies.
Peter Altmaier, senior parliamentarian in Merkel's Christian Democratic Union, said taxes were a matter for individual states but these "should as far as possible avoid dumping measures".
One German government official, who asked not to be named, said Berlin would not be giving a recommendation on the tax, preferring that Dublin decide its own restructuring plans. (Writing by Stephen Brown; Editing by Myra MacDonald)