Ireland First, Portugal and Spain Next

Article excerpt

It is that time of year when we snowbirds head south to Florida for the winter. We drove 1,750 miles in three days and visited the kids at their universities along the way. Once again we spotted signs for El Cheapo gas station, as well as several huge billboards advertising "no scalpel vasectomies--15,000 served at last count". The high point was a large sign saying "We bare all--exit now". Needless to say, we didn't.

Meanwhile, the European Union and Inter national Monetary Fund brokered a [pounds sterling]77bn bailout package for Ireland's failing banks, a condition of which was the adoption of further austerity measures. The forthcoming emergency budget in Ireland is expected to contain severe cuts in the minimum wage, social-welfare spending and public-sector jobs, as well as a new property tax and higher income taxes.

This is consistent with the recommendations set out in a paper published by the IMF, which argued that Ireland should gradually lower unemployment benefits and cut the level of its minimum wage to boost employment. The austerity measures previously announced in Ireland did not reassure the bond markets, which turned against the Irish as economic growth slowed once again. Having experienced positive GDP growth in the first quarter of 2010, Ireland saw growth turn negative in the second quarter.

The people pay

Speculation has been growing that Ireland may have to raise its corporation tax rate from 12.5 per cent as a condition of the bailout, which would make it hard for the country to attract and keep foreign direct investment. "We don't have a position on the domestic democratic politics of Ireland, but it is essential that the budget will be adopted in time and we will be able to conclude the negotiations on the EU/IMF programme in time," said the European monetary affairs commissioner, Olli Rehn. His statement implies that they do have a position--that ordinary citizens must suffer for the profligacy of the bankers. Seems rather un fair, wouldn't you say?

It remains unclear why those who didn't cause the crisis are paying such a heavy price and why they should go along with such an awful deal. Unsurprisingly there has been un rest on the streets of Dublin, and at times the government has seemed on the brink of collapse. The Green Party, a minority partner in the Fianna Fail-led coalition, called for an election to be held in January, while two other independent coalition supporters threatened to vote against elements of the austerity budget. There is every prospect that the prime minister, Brian Cowen, may lose a no-confidence vote filed by the opposition. Political turmoil often follows in the wake of financial crises. Default might still be a better option for the Irish.

The big fear for the EU is contagion of the crisis to other countries, hence the pressure on Ireland to accept a deal and to go away quietly and suffer alone.

There remains growing unease in the markets that a separate rescue package will be required for Portugal. Spain looks to be next in line. This is a major cause for concern because Spain is a much larger country and has experienced a huge decline in house prices. And everyone assumes that the Greeks will have no choice but to default on their debt; the only question is when. …