Ireland revealed an austerity plan to secure an international bailout as officials gave mixed messages on whether its debt crisis could spread to other eurozone members or even endanger the common currency.
As tempers flared across Europe over the financial and social cost of rescuing Ireland, German Chancellor Angela Merkel said on Wednesday politicians must show markets who is in charge and make investors share in the risk of future debt crises.
Ireland’s finance minister rejected any suggestion his nation’s malaise could infect other euro states like Portugal — where workers staged a general strike on Wednesday — or Spain.
PHOTO: BLOOMBERG
However, Slovakia’s finance minister said the risk of a euro zone break-up was “very real,” prompting a leading European central banker to declare there was no way back in the euro project, and that financial crisis would not break the currency union.
Irish Prime Minister Brian Cowen, whose government is close to collapse, unveiled a 15 billion-euro (US$20 billion) four-year austerity plan that immediately drew accusations of overconfidence in assuming the crippled Irish economy can grow.
“The size of the crisis means that no one will be sheltered from the contribution that has to be made towards national recovery,” he told a news conference.
The plan includes thousands of public sector job cuts, phased-in increases in Ireland’s value-added tax (VAT) rate from 2013 and social welfare savings of 2.8 billion euros by 2014, but does not touch the country’s ultra-low corporate tax rate.
It drew mixed reviews.
“The plan strikes a good balance of durable expenditure and revenue measures, with due regard to protecting the least well off,” EU Commissioner for Economic and Monetary Affairs Olli Rehn said in a statement.
However, the credibility of the plan, which is vital for meeting the terms of the IMF/EU rescue package, came into question for sticking to economic growth assumptions unveiled earlier this month to widespread skepticism.
Ireland’s austerity plan is a condition for EU/IMF aid under negotiation for a country long feted as an economic model and now the latest casualty in the 16-nation common currency bloc.
Cowen told parliament no final figure had been agreed for EU/IMF assistance, “but an amount of the order of 85 billion [euros] has been discussed.”
Credit rating agency Standard and Poors said Cowen’s -government was too optimistic in assuming growth, adding that the Irish economy would struggle to expand at all in the next two years.
S&P cut Ireland’s credit rating on Tuesday, saying it was likely to need to inject more funds into the banks, hit by a property market collapse in 2008 that forced the government into guaranteeing their liabilities.
“It seems they’re planning very stringent fiscal measures and yet they expect the economy to grow against that background. That seems highly unlikely,” Monument Securities chief economist Stephen Lewis said.
Slovak Finance Minister Ivan Miklos expressed concern that the trouble might not be contained to Ireland and Greece, which needed a bailout from the EU and IMF earlier this year.
“The risk of a eurozone break-up, or at least its very problematic functioning, is very real,” he said.
Irish Finance Minister Brian Lenihan played down this risk.
“I have absolutely no doubt that Ireland will not cause any serious dislocation in the eurozone,” he said.
Later, European Central Bank Governing Council member Axel Weber said he was convinced the euro would survive and that a financial safety net created by eurozone governments would be enough to withstand speculators.
“We must do everything to ensure the sustainability of the euro,” said Wbere, who heads the German central bank. “There’s no way back. What has grown together cannot and must not be split apart by a financial crisis.”
Investors have sold off Irish debt, particularly since Merkel raised the possibility earlier this month that state bond holders might not get all their money back in the future were another debt crisis to strike.
Merkel renewed her calls on Wednesday.
“Have politicians got the courage to make those who earn money share in the risk as well? Or is -dealing in government debt the only business in the world economy that involves no risk?” she asked the German parliament.
“This is about the primacy of politics, this is about the limits of the markets,” said the chancellor, acknowledging that her insistence on this issue was making markets nervous.
Merkel is talking about future government bond issues, but holders of current Irish debt fear the risk of default.
Dublin’s 10-year bonds are -trading far below their face value, at less than 75 cents in the euro. On Wednesday, they yielded 9.23 percent — a level at which Dublin could not realistically issue new bonds.
The euro, which has fallen sharply in recent days on fears that Ireland’s debt and budget crisis would spread to other eurozone countries such as Portugal and Spain, barely moved after the austerity plan.
The sudden implosion of Ireland’s economy has bewildered its people. Unemployment — a curse for generations of Irish that had almost lifted in the boom years — has leaped to about 14 percent from about 4 percent in just a few years.
Anne Fullham, a 44-year-old property lawyer who lost her job in March, never dreamed she would find herself taking benefits.
“When I was growing up ... it was the safest job you could possibly have — if you’re a doctor, a lawyer, an architect. We still all laugh about it in such a way that if you didn’t, you’d cry,” she said.
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