Brian Cowen is counting on Irish stoicism as he tries to satisfy those who would rescue his country from economic ruin, but both the markets and the masses are balking.
Ireland's Prime Minister on Wednesday unveiled a four-year austerity plan to secure the aid it needs from the European Union and International Monetary Fund to keep its borrowing costs from skyrocketing, a move that is already eroding his coalition government and will almost certainly thrust the country into an election when legislators vote on the plan on Dec. 7.
The package would slash thousands of public jobs, cut the minimum wage and boost household taxes. Business, however, would continue to enjoy Ireland's exceptionally low 12.5-per-cent corporate tax rate, despite Mr. Cowen's pledge that the magnitude of the crisis, which stems from the government's guarantee of all of its troubled banks' debts, means "no one will be sheltered from the contribution that has to be made toward national recovery."
As the Prime Minister made his announcement, a dozen seniors in Dublin's Northside gathered around a television in the corner of a supermarket, and their cries of shock soon brought cashiers to watch, equally horrified.
The emergency budget, demanded by the EU and IMF in exchange for an €85-billion ($115-billion) banking sector, hit these people personally: A cut in the minimum wage, to €7.65; immediate removal of €3-billion from the country's €21-billion welfare and social services budget; sales taxes rising to an astonishing 23 per cent. Plus, Irish citizens will have to pay water bills for the first time.
"Heavens, I can barely manage as it is," said pensioner Kate Mahon, 68. "I never saw anything from this Celtic Tiger business, and now they're taking away my money and even making me pay for water.'' Leaving the corporate tax rate untouched, analysts said, was probably the only way to mitigate the economic pain that the rest of the austerity plan will inflict.
Hewlett-Packard Co., the biggest computer manufacturer on the planet, this week lobbed a thinly veiled threat that it might take its Irish operations elsewhere should the tax go up. Such a scenario is unthinkable for a government about to face voters contending that its deep budget cuts and higher personal taxes won't have a noticeable effect on the economy, which the austerity plan says will grow 1 per cent next year and then 2.5 per cent until 2014.
"Their growth numbers are unlikely, so do you want to push companies away?" Benjamin Reitzes, an economist at BMO Nesbitt Burns, said in an interview. ``Maybe they'll adjust [the corporate tax rate] later, down the road, if necessary, but for now they're going to try and keep that advantage and hope that maybe helps them raise a little more revenue by creating some jobs.'' Even if leaving corporations alone were enough to keep the economy once known as the Celtic Tiger from sliding back into recession, Mr. Cowen may be relying too heavily on Irish willingness to endure tough times in proposing the rest of the plan.
Without clearer signs that the public is willing to suck it up for several years to get the country back on track, analysts questioned whether bond markets will give his government, or the one that replaces it if he's turfed out, much relief.
"The rating agencies are going to doubt the ability of any government to carry through on this sort of austerity," said Avery Shenfeld, chief economist at CIBC World Markets. "The political response within Ireland is still the remaining question mark, and there will be doubts in financial markets about any government's ability to sustain this if the economy stops growing as a result.'' Investors shrugged off the Irish rescue plan and showed little renewed faith in the ability of European leaders to keep a sovereign debt crisis from engulfing the continent.
Bond yields soared in Ireland, Greece, Portugal and Spain, continuing a selloff of government securities that was triggered last month when German Chancellor Angela Merkel said investors should be prepared to absorb more of the cost when debts go sour.
Irish bond yields are also being pushed up because Standard & Poor's on Tuesday downgraded the country's credit rating by two notches, out of concern that the cost of bailing out its banks would be greater than anticipated. The premium demanded by investors to hold Irish 10-year bonds over the German equivalent grew for a fourth straight day to 615 basis points, according to Bloomberg data, close to a record reached earlier this month.
The budget contains the Irish government's own admission of guilt: "We have eroded the income tax base to an unsustainable level," it says on page 98, an acknowledgment that a decade of tax cuts and deregulation have left the Irish state little room to manoeuvre.
But that doesn't mean it will scrape through parliament. Mr. Cowen's coalition partners in the Green Party have promised to vote for it, but opposition parties have refused his request to abstain in order to let it pass, and at least two of his Fianna Fail Party MPs have said they will vote against it. A by-election on Thursday is likely to leave him with a razor-thin, two-seat majority.
"Getting the budget through is the most important thing that can happen to this country," Mr. Cowen said in a television interview Wednesday night, urging MPs to help him avoid a deeper crisis.
In Germany, where taxpayers will bear the largest cost of the bailout, the Irish rescue is already producing waves of anger and resentment.
Though the root of the Irish crisis was arguably the liquidity and cheap credit produced by German economic policies and the common European currency, there's little appetite for rescuing the Irish – and even less for a prospective Portuguese bailout – when the country competes with Germany for low corporate tax rates.
"It is unacceptable that countries such as Ireland poached companies in Europe through low tax rates only to rely on aid from other countries during a crisis," Michael Fuchs, a member of Ms. Merkel's Christian Democrats, told the magazine Der Spiegel.
Ms. Merkel, however, contributed to the current crisis by floating the idea last month that bondholders should bear some of the cost of future sovereign-debt crises, and accept a loss on their investments through a restructuring or default. By proposing such an outcome without providing details on how or when it might apply, investors got spooked, causing Irish bond yields to spike.
With files from Bloomberg News
Doug Saunders