The World from Berlin: Austerity Plan Could 'Stall the Irish Economy'

The political uncertainty in Ireland continues as voters go to the polls to fill a vacant seat. The government faces an immediate backlash on its tough austerity measures, which have failed to calm the markets. The German press gives its verdict on Dublin's efforts to get out of the growing economic mess.

A mural of Irish Prime Minister Brian Cowen and Finance Minister Brian Lenihan on a wall in South Dublin: Can or should the EU force the Irish to swallow the bitter medicine? Zoom
AP

A mural of Irish Prime Minister Brian Cowen and Finance Minister Brian Lenihan on a wall in South Dublin: Can or should the EU force the Irish to swallow the bitter medicine?

It could hardly be a worse day for Ireland's ruling Fianna Fáil party to be facing a regional election for a vacant parliamentary seat. On Thursday, as the Irish digest the full extent of the brutal cuts and tax hikes heading their way, the voters in the remote northwestern county of Donegal are getting the chance to deliver a message via the ballot box to this deeply unpopular government.

Prime Minister Brian Cowen revealed the details of the four-year plan for tackling the massive public deficit on Wednesday, a series of steps designed to bring the state finances back in line with the EU rules of a 3 percent budget deficit by 2014, after spiralling to an enormous 32 percent this year on the back of a banking bailout that threatens to cannibalize the public finances. "Today is about Ireland putting its best foot forward," Cowen said, adding it was what the country was prepared to do "to give ourselves prospects and prosperity again."

Yet ongoing political uncertainty has left investors unconvinced that Cowen and his Finance Minister Brian Lenihan can push the first tranche of the four-year plan, the 2011 budget, through parliament on Dec. 7. The opposition center-right Fine Gael and center-left Labour Party, have so far not made it clear if they will support the budget. Furthermore, Fine Gael, likely to head the next government, has said it will not be bound by the four-year plan.

Early elections are to be held in the New Year following the decision of the junior party in the coalition, the Greens, to pull out of government as soon as the budget is passed. However, the party's decision led to demands to hold an election even sooner, so that the government negotiating with the visiting team from the European Central Bank, the European Commission and the International Monetary Fund on a massive bailout would have a popular mandate.

An Overly Optimistic Gamble?

As for the four-year plan itself, it is nothing short of a gamble. The harsh cuts to welfare, tax hikes, a new property tax, as well as the decrease to the minimum wage are designed to slice €15 billion from state spending over four years with the front-loading of €6 billion for 2011 alone. However, the figures are based on relatively strong growth of about 2.5 percent over the next four years, something that may not be possible due to the stiff fiscal measures proposed.

As expected, the government will not touch the country's low corporate tax, having likely convinced Brussels and the visiting delegation of IMF, ECB and EU experts that an increase would simply scare away foreign companies and kill off any remaining chances of economic recovery. Ireland's corporate tax rate is less than half of that of a number of EU countries, including Germany, prompting politicians in continental Europe to question why companies in Ireland should have to pay so much less.

Labor unions have also criticized the fact that low-paid workers could feel the brunt of the cuts and tax hikes, though the government insists everyone will share in the pain. Yet that pain has seen little gain so far, at least not on the markets. Despite government assurances, rumors persist that Irish senior bank debt may be restructured as part of the ongoing negotiations with the IMF and EU for an expected €85 billion. Reflecting that uncertainty, the yield on 10-year Irish bonds rose to over 9 percent on Thursday. And contagion fears have not been allayed. Analysts predict that other euro-zone countries, such as Portugal and even Spain may need a bailout in future months.

However, Klaus Regling, head of the EU rescue fund, said Thursday there was no chance that the current crisis could cause the collapse of the euro, even if other countries sought a bailout. "There's no zone danger," he told the German mass-circulation daily Bild. "No country will voluntarily give up the euro -- for weaker countries that would be economic suicide, likewise for stronger countries," he said.

Editorialists at German papers on Thursday view Ireland's plight with divided views over whether Dublin should be forced to raise its favorable corporate tax rates.

The center-right Frankfurter Allgemeine Zeitung writes:

"The expected bailout has not removed the concerns on the financial markets about the credit-worthiness of Ireland and its banks. The danger that this crisis will spread to other weak euro-zone countries like Portugal also remains. That is why there is little alternative to the Irish government's planned austerity measures. The parliament has to pass the budget, despite the political crisis, because it is a prerequisite for the flow of international aid. If the austerity budget were to fail, then that would fuel the uncertainty on the financial markets. One should not, however, overestimate how much the blood, sweat and tears program can contribute to mastering this crisis in confidence. The planned contraction is so tough that it could stall the Irish economy and endanger the recovery."

The Financial Times Deutschland writes:

"The Irish austerity plan will be tough. ... But at least Dublin has withstood the pressure to punish the country even more."

"The Irish have refused to increase their corporate tax. Many EU countries wanted to combine the plan with an increase its extremely low corporate tax rate of just 12.5 percent. The Irish are supposed to finally pay for the fact that they repeatedly attracted companies away from the rest of Europe with their cheap tax rate. Now that the country has to go looking for foreign help, some politicians in Berlin, Paris or Brussels have seen this as a time to exact their revenge."

"A sudden increase in the tax would have sent two fatal signals: first to the Irish people, who fear subjugation to the EU. And secondly to the companies that would likely move their headquarters away from Ireland and, therefore, exacerbate the small country's financial problems."

"Although the tax is very low, it brings in a relatively large amount of money. Last year it was €3.9 billion -- around 10 percent of all tax income. By comparison, in Germany corporate tax only amounts to around 5 percent of the national income. And it is therefore in the interest of Ireland's creditors and the EU states, when the controversial tax remains low for the moment."

"In the long term, Ireland will, of course, not be able to avoid taking part in a European tax harmonization. If the euro zone is to survive, then the member states are going to have to coordinate their economic and financial policies at some stage. That will only be achieved through common sense, not revenge."

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