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."
'Unfair Tax Competition Is Making Europeans Poorer'
The center-left Süddeutsche Zeitung writes:
"The austerity plan will hit the inhabitants of this highly indebted country. Only one area has miraculously escaped: companies will still only pay around 14 percent tax on their profits. Good for the companies, bad for the Irish. And not just the Irish. The people of many EU states suffer from Ireland's unfair tax competition. Now that Ireland's hyper capitalism has imploded and the European neighbors have to rescue the country, this tax dumping has to end -- and Germany and France should make sure of this in the coming days."
"Ireland, Bulgaria, Latvia and Slovakia all attract companies with their low taxes. And at the same time they get billions in EU subsidies, financed by Germany, France and other countries from which they have lured the companies."
"This unfair tax competition is making Europeans poorer. If this development continues, then corporate tax could fall to 0 percent and the employees will have to finance police, schools and social welfare all on their own. Is this what the Europe of the future should look like?"
"It is time to introduce a minimum corporate tax in the European Union. This should be low enough to make Europe competitive internationally. A good level would be 20 percent, which would ensure that companies contributed to state spending from which they profit -- security, good streets and a well-educated workforce."
"Europe should not allow itself to make do with a lazy compromise in its negotiations with Dublin, which allows Ireland to remain a tax haven. Chancellor Merkel is avoiding direct confrontation. Yet the government in Berlin owes it to the people of Germany to take a stand against tax dumping."
The business daily Handelsblatt writes:
"Something that was not an issue with the Greeks or the Latvians has suddenly become one: the relationship between national sovereignty and European solidarity."
"A new government in Ireland could refuse the austerity measures negotiated with the EU.
"Can or should the EU force the Irish to swallow the bitter medicine? ... In Germany, the political will to protect the common currency, even if it requires actions that include financial support for a weaker member state, has prevailed."
"This principle goes both ways, however. There is also a duty to be loyal to the union. Could Ireland say that it is rejecting the EU's demands? That is hard to imagine. First of all, because of the threat of insolvency: Ireland would gain nothing if it had to go knocking on the IMF's door alone."
"The Lisbon Treaty states that member states should take the common interest into account in their economic policy. Every EU state had already given up part of its sovereignty and cannot now demand it back. However, the EU has to handle questions of national pride with care."
"Sure, theoretically Ireland has one defensive maneuver left: leaving the EU. However, that is about as likely as Bavaria leaving Germany."
The left-leaning Berliner Zeitung writes:
"What torments the Irish more than anything is the knowledge that they have squandered their prospects and their economic independence themselves. That was partly a false belief in the integrity of the banks that other countries, including Germany, also succumbed to. Above all there was the ruinous wheeling and dealing between bankers, developers and politicians that was considered part of the political culture."
"Fianna Fáil, the ruling party, has long had close ties with the business world. That caused the downfall of former Prime Minister Bertie Ahern two years ago when he resigned over allegations that he had shady dealings with property developers -- an accusation he denies. His popularity and that of his party didn't suffer as long the boom continued."
"The ignominy of having to go cap in hand to creditors has, however, destroyed trust in the country's two biggest parties, Fianna Fáil and Fine Gael. It is possible that the Labour Party will win the forthcoming election and that Ireland could see its first ever Social Democratic prime minister."