Ireland to rise again, with or without euro

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Make no mistake; Ireland is not going to spend the next decade wallowing in a bog of despond, beaten down by the the EU, the IMF and a cohort of bullying bondholders. Sure, it looks grim and Brian Lenihan, the Irish finance minister did his best to make it look as grim as possible when he announced a four year austerity package on Wednesday - €15-billion of spending and tax cuts, including really nasty stuff, such as €3-billion from the welfare budget, €1.5-billion cut from civil service pay and bits hacked off healthcare and education.

In a big signal to where Ireland is going, the minimum wage is slashed. This country was a low-wage economy but over a period of 10 years it became one of the highest wage economies in Europe with per capita income exceeding Britain. Now it's going back to the future.

Except, that it probably won't go backwards. There is talk of a lost decade, one in which Ireland ploughs a hopeless furrow of meagre growth, deflation and debt repayments, like a cringing tenant farmer under the boot of a foreign landlord.

The point is that Ireland did that in past centuries. In the 20th century, Ireland had lost decades following the Second World War when the country flatllined, held back by isolationist governments obsessed with self-reliance and egged on by a reactionary Catholic church. Having experienced the good life, there is not a chance in a million that a sophisticated, worldly population, many of which people returned from North America with skills and high-level qualifications will put up with a decade of penury. Some will again quit Ireland but there is another agenda.

This government is buying time, not for itself but for the country. Even Brian Cowen, the bumptious prime minister, knows that the almost-certain loss of Thursday's by-election in County Donegal is merely a prelude to his government being booted out of office next year.

This budget is a phantasm, designed to appease EU officials in Brussels and the IMF's wonks in Washington. No one, probably least of all the men who drafted it, believes that Ireland can pay back the rescue loans, the national debt and fund the banks. Standard & Poors reckons Ireland's growth forecasts, on which rest its assumptions of deficit reduction, are unrealistic. Most economists believe Ireland will stagnate for the next few years and deflation may continue. Capital Economics, the London-based research house reckons Ireland may need another €15-billion of cuts, a third round, to get its deficit down to 3 per cent by 2014.

Of course, politically and morally, that is not a viable strategy and Ben May, economist at Capital Economics, reckons a future government might decide in due course on an alternative strategy of restructuring borrowings and quitting the euro zone. It won't happen immediately, he reckons because a default could lead to being shut out of the bond markets. This budget is about trying to reduce the core deficit such that the Irish government can pay the basic bills, teacher's salaries, basic health, police pay. Once those budgets are balanced, the Irish will cock a snook at the European Central Bank and say goodbye to the common currency.

They will get back to their core strengths - being a low-tax, high-skilled contract manufacturer, a cheap but efficient corporate location for Europe, a seller of services and wheeling and dealing but with real estate kept in check. This is the Ireland that was succesful before low euro interest rates manufactured a disastrous boom and it could be again, without the euro.

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