Ireland told to stick to austerity path

Wed, Jun 6, 2012, 01:00

INTERNATIONAL FINANCIAL chiefs say Ireland must stick to the tough austerity path trodden by the Baltic states if it is to return to sustainable growth and economic stability.

At a conference in the Latvian capital, Riga, senior officials from the European Union, International Monetary Fund and European Central Bank hailed the swift recovery of the one-time “Baltic tigers” from a crushing recession and urged Ireland to follow their example.

After several years of a credit-fuelled boom around their accession to the EU in 2004, Latvia, Estonia and Lithuania went into precipitous decline when the economic crisis struck.

Latvia’s economy shrank by 25 per cent from 2008-10, its second-biggest bank collapsed and it agreed a €7.5 billion emergency loan from the EU and IMF.

Through swingeing job cuts, wage reductions and tax hikes, the government slashed Latvia’s budget deficit and the economy grew 5.5 per cent last year; it is expected to expand by at least 3 per cent in 2012.

The social costs in Latvia were huge, however – poverty soared, unemployment more than tripled and is still about 16 per cent and mass emigration threatens to cause a demographic crisis. However the EU-IMF-ECB troika sees Riga as an exemplar for Dublin and other crisis-hit governments.

“This kind of programme is working in Ireland,” said EU commissioner for economic and monetary affairs Olli Rehn, who joined IMF managing director Christine Lagarde and ECB executive board member Jorg Asmussen at a Riga conference that lauded Latvia’s recovery.

“Ireland has recovered positive growth this year and it is also projected for next year. I don’t underestimate the social problems in Ireland. It has been very painful, but it is working,” he added.

Latvian prime minister Valdis Dombrovskis said Ireland was “doing a very good job of dealing with its problems” and “would be the next country to successfully finish its IMF programme and return to stability and economic growth”. He gave a withering assessment of Ireland’s decision to cover the debts of its banks, however.

“Ireland could have stayed without an IMF programme if the government hadn’t extended a blanket bank guarantee. It is easy in retrospect to say that was not a good decision . . . It didn’t pay off,” said Mr Dombrovskis, whose handling of Latvia’s crisis was widely praised.

As finance officials hailed the recovery of Latvia and its neighbours, a rare note of dissent was sounded by Sharan Burrow, general secretary of the International Trade Union Confederation.

She said the social costs of austerity were too high in the Baltic states and in Ireland. “In Ireland, if you listen to the stories of the working people, they are more pessimistic than ever before.”

Looking at ways to resolve the crisis in the euro zone and restructure the bloc, Mr Asmussen advocated greater fiscal, financial and political integration.

“We have to deal with the incredibly difficult situation in some countries with the tool-box we have, and I am convinced we can do this. For the long-term perspective, at the EU summit at the end of June we have to lay out where we want to go and how to implement it,” he said.

Ms Lagarde said she found his proposals “very convincing. If I could buy a 10-year bond in that, I would.”