International pressure on Ireland to accept bailout money was not an act of bullying but a necessary move to safeguard the euro from the onslaught of market speculators, according to a local economist.
“When the momentum of speculation picks up, as it did in the Irish case, it inevitably leads to negative perceptions and borrowing costs start shooting up. The European Central Bank and the European Commission feared it could lead to a point of no return and harm the eurozone as a whole,” Joe Vella Bonnici said.
Ireland had initially rejected bailout money, insisting the situation was under control but it reversed its stand after top level meetings between the Irish government and ECB and International Monetary Fund officials.
On Sunday, EU finance ministers agreed to bail out the Irish economy with some €90 billion. The funds will come from an EU emergency mechanism agreed to earlier this year and the IMF.
Ireland is expected to run up a massive deficit of 32 per cent of GDP this year after the government bailed out the country’s banks when the property bubble burst in the wake of the international recession.
The EU-led Irish bailout was an attempt to calm the waters, Mr Vella Bonnici said, adding it meant Ireland would lose economic sovereignty.
Ireland’s woes worsened after investors got the jitters, fearing the country would find it difficult to refinance its debt. This led to higher-interest loans, which were also affecting other EU countries.
According to Mr Vella Bonnici, the EU’s Greek bailout and the subsequent agreement on a multi-billion euro rescue package were meant to send a signal to market speculators the EU would defend its currency at all costs.
“Unfortunately, it only took a couple of months before speculators turned their sights on Ireland and there is a veritable risk of contagion as speculators go after other countries. The waters may calm down temporarily but what will happen in the next couple of months nobody knows,” Mr Vella Bonnici said, pointing to the serious debt problems of Portugal, Spain and Italy.
Ireland was badly hit by the international recession last year and austerity measures have left their toll on public services, jobs and people’s disposable income. The situation is only expected to become worse since the bailout is conditional on Ireland accepting a four-year austerity plan to strengthen public finances.
Most people realise the problems Ireland has were brought about because of “the horrific mismanagement of the economy since 2001”, according to John O’Brennan from Nui Maynooth University’s sociology department.
“Public servants have seen salary reductions of up to 20 per cent over the last 18 months with comparable reductions for private sector employees,” Dr O’Brennan said.
Some companies have also cut the number of working days from five to three with the aim of maintaining employment levels and competitiveness.
However, the spending cuts and tax rises the Irish have had to endure represent a small change compared to what is now being proposed for the four years ahead.
“It is only next year people will see the impact of large scale cut backs in public spending. But, perhaps, the most pressing societal danger is the number of households exposed to negative equity and re-possession of homes. Without government action, we are going to see a catastrophic social conflict in the years ahead,” Dr O’Brennan warned.
The Irish doldrums will not go away anytime soon and the situation took a turn for the worse yesterday after the Green Party pulled the plug on the coalition government asking for elections to be held by January.
The political turmoil and public unrest could lead to renewed investor fears creating a fresh round of market speculation.
And coupled with tensions on the Korean peninsula, markets are expected to remain on jittery ground.