A difficult but essential deal

 

THE PROGRAMME for Assistance announced late last evening probably is, as the Taoiseach conceded “the best available deal for Ireland”. It represents nonetheless a defeat for this State which has turned us, in the blink of an eye, from European success story to a people at the mercy of the benevolence of others. It was notable that the announcement was made in Brussels and only after that was the Government able to hold its press conference in Dublin.

Most of the programme is along the lines that were expected. A package of €85 billion broken down into an immediate €10 billion for the banks with a further €25 billion of a contingency. The rest is €50 billion set aside to cover Budget deficits. What was not wholly expected is the fact that this State must come up with one half (€17.5 billion) of the money being made available to the banks. If it was all coming from cash reserves it would not be so bad but €12 billion of it will be taken from the pension reserve fund. The consequences for public sector pensions could be significant.

If the entire €85 billion is drawn down, it will involve an average annual interest rate of 5.83 per cent which is higher than had been hoped and higher than Greece is paying. The Government is unable to say what the average interest rate will be if lesser sums are drawn down. Indeed, the press conference provided little by way of confidence. The Taoiseach was asked, quite simply, if the country could afford this plan and whether the huge burden of interest payments might not prevent the economy from returning to the growth levels which are necessary to make it work. The Taoiseach’s answer was long, convoluted and evasive.

Certainly, the EU and the IMF must have their doubts on the targets. The programme allows another year (until 2015) for the three per cent deficit target to be reached. This concession is there precisely because economic growth might not reach the levels hoped for. That though is the only basis for the extra year and the concession cannot be deployed to soften the necessary adjustments to the public finances, starting with €6 billion in next month’s Budget.

There is to be no change to the 12.5 per cent corporation tax rate and, in reality, there never was much of a liklehood that there would be. The rate is significant in attracting companies to Ireland but so also does membership of the eurozone and the presence of a skilled and educated workforce. Those companies primarily interested in low tax rates would settle in countries outside the EU, like Switzerland, if our tax rate was raised significantly so the rate itself is not against EU interests.

The programme will be unpalatable to many people. It involves a loss of sovereignty and many years of relative hardship ahead. The pain is all the more acute for the fact that this calamity was largely self-inflicted. The IMF programme for Ireland will be parsed and analysed for years to come. However, if it brings about stability and plants the seeds for a return to sustainable economic growth, it will be worth the sacrifices. This deal is better than no deal.