Irish Expected to Oust Ruling Party

The Irish headed for the polls in parliamentary elections on Friday amid the worst economic recession in decades. The centrist Fine Gael, the largest opposition party, was expected to win if not an outright majority then certainly a plurality of seats in the lower chamber of parliament.

The country’s ruling and liberal Fianna Fáil party was preparing to be crippled with some polls suggesting it could lose as many as fifty seats, ending the dominant position it has commanded since the republic was proclaimed more than sixty years ago.

Voters were in a vicious mood over the bursting of a property bubble that left them steeped in debt and facing years of austerity to repay the European Union and the International Monetary Fund for a €85 billion bailout.

Despite the return of mass emigration and high unemployment, Ireland has not experienced the kind of mass demonstrations witnessed in fellow eurozone member Greece. While parties on the far left as well as the nationalist Sinn Féin have seen a surge in support on promises to rip up the bailout deal, they were likely to remain in the minority.

If Fine Gael makes a government alone, it will probably be with the help of four or five independent parliamentarians. Analysts expect it to form a coalition with Labor instead as it has in the past. The biggest hurdle to such a coalition is the country’s record 12 percent budget deficit. Labor wants an extra year, until 2016, to get it under 3 percent of GDP as required by European treaty.

Even as the Irish are struggling, their economic fundamentals are sound and their demographic outlook favorable enough for their country to return to a path of prosperity.

Ireland is one of the economically freest countries in the world with low corporate tax rates and very little impediments to foreign trade and investment. Some restructuring of its debt obligations is likely. Finn Gael leader Enda Kenny has pledged to renegotiate the penal interest rate that the government is paying for its bailout.

Over the long run, the next government has to root out the cronyism that gave property developers too much political influence, particularly on the local level. Kenny’s main responsibility as prime minister is to sustain the policies that fostered Ireland’s strong growth in the first place though. The left likes to blame the banks but if Ireland is to avoid depression, it can’t afford to

European States Seize Pension Funds

While most countries in Europe are bracing for spending cuts, some governments are hard pressed to implement austerity measures. Multibillion euro pension funds are a convenient source of revenue for politicians who don’t want to cut back on public spending or privatize welfare services.

Across Europe, pension schemes are organized either by the state or by semiprivate institutions that are heavily regulated. Every month, European workers set aside part of their income for their retirement except they are saving not for their own golden years but financing directly the retirement of seniors — hoping that, by the time they retire, tomorrow’s working generation will foot the bill. Read more “European States Seize Pension Funds”

Ireland Announces Billions in Spending Cuts

The Irish government announced a combination of deep spending cuts and steep tax increases on Wednesday in order to rein in deficit spending and secure a bailout from other eurozone states.

Ireland is currently borrowing nearly one out of every three euros its government spends. According to Prime Minister Brian Cowen, it is high time that the country confronts this challenge. “The size of the crisis means no one can be sheltered from the contribution that has to be made,” he said.

The Irish face €15 billion in spending cuts over the next four years. Welfare provisions, which are among the most generous in Europe, will be subject to some 15 percent in cutbacks while public-sector salaries will be reduced by 10 percent. At the same time the government intends to bring down unemployment from 13.6 percent today to no more than 10 percent four years from now. According to the plans, its budget deficit should amount to no more than 9.1 percent of GDP by next year.

Ireland has been bracing for spending cuts for several months. In the wake of the financial meltdown the former Celtic Tiger plunged deep in the red, saving two of the country’s largest banks from bankruptcy with a multibillion euro bailout effort.

Fearful that a crisis in Ireland could spill over to other highly indebted eurozone members, including Portugal and Spain, Cowen’s government accepted a rescue package from the European Union and the International Monetary Fund this weekend worth €85 billion in loan guarantees. In return, Ireland has to cut spending and raise taxes.

The government has pledged to maintain the corporate tax rate at 12.5 percent, the lowest in the eurozone, which has helped to lure companies as Intel, Microsoft and Pfizer to set up operations in the country. Opposition parties, though adamantly opposed to the European rescue package, agree that this low corporate tax regime is quintessential to Ireland’s future recovery. Multinational companies employ nearly one out of every seven workers in Ireland.

The income tax will be reformed instead in order to raise an additional €1.9 billion in revenues. The value-added tax rate will increase with 1 percentage point in 2013.

Ireland Renews Fears of European Debt Crisis

Pressure is mounting on Ireland to accept a European bailout in order to restore confidence with investors in the solvency of other eurozone members deep in red ink. With its budget deficit expected to reach 30 percent this year, fear of a meltdown similar to Greece’s this spring is mounting.

When Greece was faced with bankruptcy last April, European leaders agreed to an unprecedented rescue effort to save not only Greece from sovereign default but safeguard the future of the euro itself. With a €750 billion stabilization package, the European Commission, individual member states as well as the International Monetary Fund sought to restore confidence in the common currency. Read more “Ireland Renews Fears of European Debt Crisis”

Former Celtic Tiger Faces Deep Budget Cuts

With a budget deficit approaching 30 percent and investor confidence in its sovereign bonds falling, pressure on Ireland to either rein in spending or seek help from its fellow European Union member states has been mounting. Some even wonder if it might have to brace for a disaster similar to Greece’s.

In the wake of April’s financial meltdown in Greece, European leaders agreed to an unprecedented rescue effort to save not only Greece from sovereign default but protect the future of the euro itself. With a €750 billion stabilization package, the European Commission, individual member states as well as the International Monetary Fund sought to restore confidence in the common currency.

Ireland has so far refused to take aid from its European neighbors with Dublin insisting that it is not engaged in any bailout talks. The Irish government believes that it can present a credible austerity budget next month to satisfy investors. A rescue effort, by contrast, would only undermine investors’ confidence in the state’s ability to repay its loans. For a country that is extremely dependent on foreign investment, which represent two-thirds of GDP, that is a risk it can ill-afford to take.

A crisis in Ireland, moreover, would likely spill over to the continent where countries like Portugal and Spain are mired in recession.

Unlike Greece, Ireland entered recession with a budget surplus and after several years of strong economic growth. It did witness a massive housing boom in the years preceding the crisis which severely weakened its financial sector.

At A Fistful of Euros, P.O. Neill summarizes the roots of Ireland’s current predicament:

First, there were massive explicit and implicit subsidies to the banking and property sectors, the implicit subsidies now becoming explicit during the cleanup phase.

Second, there was a distortion in the perceived cost of public services, as the revenue windfall from the property boom made it seem that more resources could be poured into public services without having to raise taxes.

Third, there was (and is) a political economy that emphasizes pie-sharing and co-option rather than questions of efficiency and distribution, which in turn led to a don’t-rock-the-boat reaction to critics.

And fourth, there was a naive trade union sector (referring in particular to unions for lower paid workers) that didn’t see how their demands for closer alignment of public- and private-sector pay, national wage bargaining, and final salary pension schemes would interact with each other to produce massive pay and benefit differentials.

The result, according to Neill, was a banking sector that grew too large and a public sector that grew larger at an underestimated cost.

Despite high levels of government spending, especially in recent months, Ireland remains economically one of the freest nations in the world with a strong protection of property rights, a near lack of corruption, efficient business regulations and competitive tax rates. “These strengths,” notes the 2010 Index of Economic Freedom compiled by the conservative Heritage Foundation and The Wall Street Journal, “provide solid foundations on which to build recovery and curb long-term unemployment.”