24 November 2010
After Greece, now Ireland. Dublin has announced that it needs up to €90bn to help its banks and reduce the borrowing costs in international markets. As several of the Irish banks have been partly nationalised, most of their hefty debt load is now actually government debt. The financial burden is becoming too big for Ireland (the estimated cost of bailing out the indebted banks is around €45bn – BBC), which has already gone through a deep crisis due to the collapse of its property market.
The European Union (EU) and International Monetary Fund (IMF) have already assured that they are ready to accommodate the Irish request. EU Economic affairs Commissioner Olli Rehn said: “Providing assistance to Ireland is warranted to safeguard the financial stability in Europe” (Reuters). The United Kingdom and Sweden – two non-eurozone countries – are also considering bilateral loans. While all sides will discuss the exact amount and conditions of the financial assistance package, the concern is about the possible contagion to other heavily indebted eurozone countries – Portugal and Spain.
The money will inevitably come with strings attached though. The eurozone and International Monetary Fund’s experts will see that the Irish budgetary strategy for next 4 years (yet to be adopted) is scrupulously implemented. Ireland will have to undergo public spending cuts of at least €15bn. While the hope is that this “internal devaluation” would help Ireland to regain its international competitiveness, many economists fear that the opposite could happen and the new austerity measures could push the Celtic Tiger into even deeper economic troubles. Another bone of contention is the fear that Ireland will be forced to raise its corporate tax rates (the lowest in Europe) in order to raise revenue.
The Irish who have already tightened the belts for the last year or two are unhappy with the government’s handling of the crisis and early elections will be called after the budget gets passed.
Another concern is how the crisis was managed and communicated to the rest of the world (and, most importantly, the financial markets). Irish leaders were saying for weeks that they are determined to resolve their problems on their own and will not need a bailout. However, everyone else in the eurozone was already working to get things ready for the bail-out. Belgian finance minister Didier Reynders even joked that everything has been already agreed even without any Irish request: “Now we have the answer, we are just waiting for the question” (The Telegraph).
The Irish crisis has revived the discussions about the deeper structural problems in eurozone, with many observers arguing that monetary union without economic and political union cannot work successfully in the long-term. While the planned reforms in the eurozone economic governance will strengthen the economic surveillance and coordination, they will not resolve this inherent structural problem. While Mr Van Rompuy may have made an overstatement regarding the EU survival, it is clear that the eurozone has still a long way to go to overcome the short and long-term problems.
Sources and links to further information:
- “Teetering Irish government sets out 4-year plan,” Reuters, 23 Nov 2010
- “Ireland set for nervy two weeks until budget vote,” Reuters, 22 Nov 2010
- “Ireland applies for €90bn bail-out as eurozone trembles,” EUobserver, 22 Nov 2010
- “Irish seek aid as Europe tries to ensure stability,” Reuters, 21 Nov 2010
- “British banks have £140 billion exposure to Ireland’s economic crisis,” The Telegraph, 17 Nov 2010