Only sustained cuts can now keep Ireland afloat
ANALYSIS:As EU commissioner Olli Rehn has implied, if the Government fails to act, it will be reduced to implementing policies dictated from abroad, writes ARTHUR BEESLEY
OLLI REHN’S call for a four-year package of budget and reform measures from the Government underscores mounting anxiety in Brussels over Ireland’s precarious economic position. His intervention can also be read as a wake-up call to the Irish body politic at large.
To those who fear the worst for the State, the EU’s economics commissioner has offered a modicum of comfort in his assessment that emergency aid from the EU and the International Monetary Fund (IMF) should not be required. But this is far from an all-clear.
To retrieve the situation, he says Minister for Finance Brian Lenihan must quickly come forward with precisely formulated measures to pare back radically the budget deficit in the next four years.
That’s well beyond the mandate of the current Fianna Fáil-led administration and far outside the scope of the Government’s preparations for the 2011 budget, already set to stretch the Coalition to the limit. Rehn knows this well; he is not a fool. It is simply a reflection of the current pressure on Ireland that he wants clear policy commitments now to continue the cuts in 2012, 2013 and 2014.
In official circles in Brussels Ireland’s malaise is viewed with a sense of foreboding and dread. Bond yields and other market indicators are rising at an alarming rate, the economy is shrinking again, Anglo Irish Bank represents an astonishing burden and the Government is at the mercy of a clutch of TDs whose eyes are fixed on local issues.
In this tense scenario, today’s announcement on the latest estimate for the cost of rescuing Anglo is meant to foster clarity and calm. It is but the latest attempt in a long line of initiatives to assert control over the banking crisis, each of them heralded as the definitive strike.
Given the inherent fragility of financial forecasting in a scenario such as this, it is impossible to predict whether anything the Government now says about Anglo can retrieve lost confidence.
It follows that the market – which has shown little enthusiasm for soothing words from Lenihan and Taoiseach Brian Cowen – could go either way. The Anglo announcement might just do the trick, demonstrating that a way can be found to manage the ordeal. But, on the other hand, it might not. Whatever the actual figure, there
is no way of dressing it up as something pleasant or something which will not sap resources and morale.
Judgment will be seen in bond yields in the days and weeks ahead. It is clear, however, that a situation which is scarcely under control at present could quickly spiral out of control.
That is the big fear, notwithstanding near constant reassurance about the Government coffers being fully funded for months to come. Although the entire thrust of the Government’s effort is to reassert control, the spike in its borrowing costs shows it is not winning the argument.
Irish bond yields are now at similar levels to those that prevailed for Greece in the weeks before its slide into the arms of the EU and the IMF. For Cowen and the people he serves the pivotal question right now is whether Ireland can avoid the same fate. Nothing less than national economic sovereignty is at stake, for the Government would be reduced to implementing policies directed from abroad in that eventuality.
Are things that bad already?
Nobody shouts it out loud, but thoughts in Brussels and other European capitals have already turned to the possibility of a doomsday scenario. Reports in serious European newspapers – titles such as Le Mondeand Handelsblatt– imply disquiet and concern in Paris, Berlin and Frankfurt, home of the European Central Bank. At high levels in the EU institutions, well-placed sources speak of a looming moment of truth for Ireland.
Already the Anglo announcement seems certain to lead to a huge once-off increase in this year’s budget deficit. But there are many other variables. Leaving aside uncertainty over the Government’s viability and the challenges it faces in trying to agree a budget for 2011, more concern surrounds the possibility that AIB might need more State aid. Further clarity is expected on this issue today.
Enter Rehn, who responded after markets closed on Tuesday night to a series of questions The Irish Timessubmitted to his office last Friday.
A notably cautious man, he did not answer queries about the now-infamous New York Timesitem which discussed whether one bank – Anglo – could bring down a country. Neither did he comment on current Irish borrowing rates.
The commissioner made clear, however, the view that the recovery of market confidence depends on front-loading precise budgetary measures now which will reduce the cost of running the State and ease its dependence on borrowing.
If rising bond yields denote worry about the scale of the State’s debt mountain, pushing forward with a credible plan to curtail borrowing is the only way to appease the doubters. The need for this is self-evident, but it is highly sensitive politically given that public wages, social welfare and pensions take up such a large proportion of State expenditure.
Rehn didn’t specify where any new cuts should be made and he declined an opportunity to do so yesterday. Still, he has sent an implicit signal that politicking in Dublin over such measures looks like a luxury whose time has passed. Indeed, his real message is that inaction on the reform front now will result in the same measures being imposed on very severe terms from outside.
Ireland is not Greece, but that country’s plight illustrates the price of emergency aid. Key elements of a legally binding recovery programme agreed with the EU and IMF embrace drastic spending cuts, including social security cuts; far-reaching pension reform; the “modernisation” of its public administration; and increased VAT and other taxes.
None of this should come as any surprise for Ireland, but it illustrates just how cornered the Government now is – and how Fine Gael and Labour would have no choice but to take a scythe ruthlessly to public spending if they prevailed after an election.
Blame for this state of affairs is for another day. It’s a survival game now and the wolves are circling.
Arthur Beesley is European Correspondent