Ireland plans drastic cuts to prevent debt crisis

Ireland plans drastic cuts to prevent debt crisis
Ireland is to demand pay cuts for civil servants and public employees to prevent the budget deficit soaring to 12pc of gross domestic product by next year – becoming the first country in the eurozone to resort to 1930s-style wage deflation to claw back competitiveness.

By Ambrose Evans-PritchardLast Updated: 6:13AM GMT 15 Jan 2009
"We will take whatever decisions are necessary," said premier Brian Cowen. The Taoiseach yesterday denied reports that he invoked the spectre of the International Monetary Fund to terrify the trade unions into submission. But the threat – uttered or not – has been picked up nevertheless by labour leaders.
"The IMF's normal prescription in such situations involves mass dismissals and pay cuts, along with cuts in pensions," said Dan Murphy, head of the public service union, who accepts the need for draconian retrenchment.
The budget deficit will soar to 9.6pc of GDP this year as property tax revenues collapse. It is so far above the EU's Maastricht limit of 3pc that Brussels will have to impose sanctions. It is still rising fast.
"On the basis of existing policy, A General Government Deficit in the range of 11pc to 12pc of GDP is in prospect for each of the years to 2013. This is untenable," said the finance ministry in a fresh revision to its (already dire) Stability Programme. It has drafted a swingeing five-year plan, slashing spending by €16bn (£14.4bn) or 8pc of GDP by 2013.
The markets are watching nervously. Yields on Irish 10-year bonds have risen to 180 basis points over German Bunds. Standard & Poor's has issued a "negative outlook" alert on Ireland's AAA rating, noting that the bank bail-out has increased state liabilities by 228pc of GDP. This guarantee may be tested. While Dublin's "Canary Dwarf" has been a success story – leading a finance sector that makes up nearly 10pc of Irish output – it has also become an Achilles Heel.
Chris Pryce from Fitch Ratings said Ireland had shown great courage by facing up to the full implications of the global crisis earlier than others. "We're very impressed by the vigour of the Irish government," he said. Even so, the public debt will jump from 25pc of GDP in 2007 to 62pc by 2010.
It is a grim moment for the Celtic Tiger after achieving so much as a high-tech hub with an educated work-force and one of the most flexible economies in the world – all qualities that should help the country pull through in the end.
Dublin expects the economy to shrink by 4pc this year as the post-bubble hangover goes from bad to worse. Unemployment will hit 12pc by December, up from 4.9pc in early 2008.
Ireland is paying the price for letting wages spiral upwards during the long boom, eating away at competitiveness. The computer group Dell, Ireland's top exporter, has stunned the country by announcing plans to shift its EU manufacturing arm from Limerick to Poland, taking 4pc of Irish GDP with it. Workers in Eastern Europe are closing the technology gap, and they are much cheaper.
Dublin house prices have fallen 28pc from their peak. Professor Morgan Kelly from University College Dublin – the first to predict last year that Irish banks would need a state rescue – fears that prices will drop 80pc in real terms before the glut of unsold property is cleared.
"It has taken us 10 years to get into this situation. It will in all likelihood take us 10 years to get out of it. Construction will fall to zero for the foreseeable future," he told a Dublin conference. There may be net "demolition".
It is hot debate whether euro membership is making matters worse at this stage. The country has not been able to "get ahead of the curve" over the last year by slashing interest rates. Indeed, Frankfurt raised rates in July.
The euro has jumped almost 30pc against sterling in a year. This amounts to an "asymmetric shock" for Ireland, which depends on Britain for 21pc of its exports. John Whelan, head of the Irish Exporters Association, said the strong euro puts100,000 jobs at risk this year.
"Most companies cannot make money selling into the UK at an exchange rate above 0.80 pence and today the euro is worth 0.91 pence. Currency hedges will run out by March, and the small guys are feeling the full whack instantly," he said.
Mr Whelan said there was a feeling of betrayal that Britain did not join the euro alongside Ireland – or shortly after – despite Labour's pledge to do so.
"We thought Britain would join in 2003, but then Tony Blair lost his popularity in Iraq and never tried," he said.
Finance Minister Brian Lenihan has even accused Britain of pursuing a beggar-thy-neighbour strategy.

http://www.telegraph.co.uk/finance/4241720/Ireland-plans-drastic-cuts-to-prevent-debt-crisis.html