Ireland is a small country of 4.5 million people which in the years before the crash had been the favourite showcase of the European union for its new found prosperity, entrepreneurship and innovative banking sector. All of this has turned to dust with the global financial crisis , the collapse of the Irish financial sector after its bubble burst and the ensuing recession and high unemployment (13.9 %) The six leading Irish banks were heavily over invested in loans tied to the bubble and had expanded well beyond their safe limits. When they crashed and faced insolvency the Irish government, despite lacking the backing of its own central bank bailed them out and assumed the burden of their debt. But unfortunately this did not stop the hemorrhaging. Further runs on the banks deposit base have continued . Since the Irish banks are in turn indebted to the German , French, Belgium and British banks their total collapse would also destabilize a major chunk of European banking. So to prevent this the European leadership including Great Britain have offered a major set of loans to forestall the collapse and permit Ireland to recover over the course of time.
But very unfortunately and foolishly in my judgement these loans also come with major strings of austerity attached. The conditionality terms are so onerous that there has already been street demonstrations opposed to the bailout in the Irish capital. In addition the Green party has announced it will leave the fragile coalition government thereby precipitating an election which the Labour opposition party has a good chance to win. It claims to be opposed to the bailout and its onerous terms but it is not clear what its alternative policy is.
Given that Ireland is already in a deep recession imposing austerity will simply make things worse. The proposed austerity includes the introduction of a property tax (in itself not necessarily a bad idea); a water tax; a substantial cut in the minimum wage down to €7.65 an hour from € 8.65, the taxation of low paid workers who were previously tax exempt; public sector job cuts of 5000 and the elimination of 15,000 other public sector jobs through attrition; cuts to child benefits and other social welfare benefits. All of these cuts will come about because of the bad behaviour of the private banks, the flawed nature of the Irish government's initial bailout and the bad policies of the European union and central bank with respect to debt and banking crises. But it will be the general public and the poor in particular who will pay the price.
Given the small size of the Irish economy where the current net debt to GDP ratio is about 75 % it would have been quite feasible to have helped Ireland out of the troubles without imposing draconian austerity and imposing more of the burden on the banking financiers who are largely responsible for the mess in the first place. Some of the bondholders will be settling for a haircut down to 20 % of the value of the bonds they hold but more needs to be done.We shall see where this leads but it is really time overdue for a major rethink about how Europe is operating.
The €80 to 90 billion loan that the EU and the IMF are advancing is backed up by the €750 b. fund at their disposal( According to the F.T. there is 60 billion in the European financial stability mechanism, 440 billion in the European financial stability facility based in Luxembourg based on AAA guaranteed funds raised in the money markets backed by the 16 countries which use the euro as well as €250 b. from the I.M.F.)
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