Pressure is mounting on Ireland to agree to a joint EU International Monetary Fund rescue package as confidence in the country’s banking system continues to fade.
Although once hailed as the ‘Celtic Tiger’ for its rapid economic growth, Ireland has seen its economy nosedive in the past three years, due mainly to the collapse of its property market. House values have fallen by between 50 and 60 per cent, and bad debts – mainly loans to property developers – accumulated in the country’s main banks, leading to a massive €45 billion government bailout.
It was this bailout that severely dented the Irish government’s finances which is now expected to lead to a massive budget deficit of 32 per cent of GDP this year. Ireland is now finding it difficult to repay record government debt, which has reached €100 billion, and is struggling with record high unemployment of 13.2 per cent.
The banks are making record losses and have had to seek assistance from the European Central Bank, which is no longer comfortable with funding them, hence the pressure on Dublin to accept a bailout.
Ireland is also being urged by fellow eurozone countries Portugal and Spain to accept a bailout, as they would like this whole issue to be settled in order to stop the turmoil in the financial markets, and to prevent the crisis from spreading to them.
The Irish government argues that the country is fully funded until at least the middle of next year and therefore does not need to borrow any money for now. However, Irish Central Bank governor Patrick Honohan said last Thursday he expects Ireland to accept a “very substantial loan” as part of an EU-backed bailout, so the situation is still very fluid.
If a bailout or a package for the banking sector is requested by the Irish government, experts say it will have to be large enough to end all speculation that any losses at Irish banks could destabilise the eurozone, and would probably be in the region of €80 billion.
The Irish government’s reluctance to ask for such funds is largely a matter of pride as an emergency financial handout is considered by many to be a source of embarrassment. Ireland, which has a history of voting against EU treaties in popular referendums and of defending its sovereignty, wants to keep as much control of its own affairs as possible.
Batt O’Keeffe, Ireland’s Enterprise Minister, remarked last week: “It has been a very hard-won sovereignty for this country and the government is not going to give over that sovereignty to anyone.”
There is another reason why Ireland is reluctant to agree to an EU-IMF bailout, and that is its insistence on keeping its low corporate tax rate, which has been so successful in attracting foreign direct investment to the country.
The Irish fear that the European Commission, which last week sent representatives to Dublin together with IMF and European Central Bank officials to assess the situation, might insist on higher business tax rates as a price for a bailout.
It is no secret that large EU countries like Germany and France have always disliked Ireland’s low tax regime, something Ireland is particularly sensitive about. The government, however, is insisting that the country’s low corporate tax rate is simply non-negotiable and any increase would lead to investors leaving Ireland – and making a difficult economic situation worse.
When Irish voters backed the EU’s Lisbon Treaty in last year’s referendum, they did so partly because the government had got a pledge from its fellow EU member states that the treaty in no way infringed upon Ireland’s sovereignty in matters of taxation.
This guarantee, as well as a number of other assurances (neutrality, family law and the right to a seat on the European Commission), were instrumental in reversing the 2008 rejection of the Lisbon Treaty into a massive 67.1 per cent ‘Yes’ vote in 2009.
The possibility of Ireland needing a bailout is bound to have severe political consequences on the ruling Fianna Fail – Green coalition government which is already very unpopular.
If Fianna Fail – which on a European level is part of the Alliance of Liberals and Democrats – loses this week’s by-election the coalition’s parliamentary majority will be reduced to just two. Considering there are three more by-elections next year, it is very doubtful whether the government can continue in office much longer, and a general election is likely soon, especially since relations between the two coalition partners has been strained by this crisis.
The Irish government now plans to pass a four-year austerity Budget in the first week of December and has already said there will be spending cuts of €6 billion, a figure endorsed by the European Commission.
These cuts – which are bound to be controversial – probably won’t be enough to prevent some sort of bailout for the Irish economy, so I think we will see some sort of EU-IMF rescue plan agreed to in the coming few days, most likely targeted specifically at the banking sector.