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Ireland's austerity steps leading it astray, many fear

Its gritty efforts to tame a runaway budget deficit made it a Eurozone trailblazer. But it could end up a cautionary tale.

August 05, 2010|Henry Chu

LONDON — It was the first country in Europe to hack away at spending to wrestle a raging budget deficit under control, winning praise as a trailblazer whose decisive austerity program showed the way for the rest of the continent.

But nearly two years into its shock treatment, Ireland is faced with rising public debt, dwindling private investment and record numbers of people out of work, and some are asking whether the Emerald Isle is indeed a role model, or a cautionary tale instead.

The answer has implications for nations across the continent as governments that only months earlier had argued for stimulus packages to keep their recession-hit economies afloat are scrambling to tighten their purse strings.

And it has resonance across the Atlantic, as Republican lawmakers raise questions about the cost of President Obama's stimulus initiatives.

Officials in Ireland say the payoffs from their austerity plan are gradual, designed to put the country of 4.5 million people on more sound financial footing and set the stage for sustained growth through structural reforms.

But with the unemployment rate exceeding 13% and consumer demand crippled, a number of economists and analysts are expressing concern that Ireland has been sucked into a downward spiral from which escape grows more difficult by the day.

"The key question is ... has the medicine worked? Has what the government said would happen happened in terms of reviving economic growth?" said Michael Burke, an economist based in London. "The resounding answer is: Absolutely not."

Even the aim of soothing the financial markets has fallen short. The cost of government borrowing has gone up, not down, since Dublin unveiled another raft of austerity cuts at the end of last year. And last month, the credit rating agency Moody's downgraded Ireland's government bond rating.

"This medicine isn't working," Burke said. "It's actually killing the patient."

Worried that such measures might boomerang, President Obama wrote a letter to leaders of fellow Group of 20 nations in June warning them not to cut public spending too savagely, so as not to strangle demand and curtail growth. But G-20 members Britain and Germany and nonmembers Spain and Portugal have pressed ahead with austerity plans, some on a scale not seen in decades.

Ireland started down the path first, after its real estate bubble burst spectacularly in 2008 and the "Celtic Tiger" suddenly lost its roar.

Since then, Dublin has issued one straitened budget after another. It gouged $5 billion from its budget for this year, paring back services and shrinking paychecks for teachers, nurses and other public employees; it plans to remove an additional $3.9 billion next year.

So far, the government has benefited from a widespread consensus that major belt-tightening is necessary to bring down a deficit equal to more than 14% of gross domestic product.

"The mood was 'Let's take some pain and let's get back to where we were a few years ago,'" Burke said. "A lot of people expected the medicine would be painful but it would work."

But there are signs that the consensus has begun to fray.

The long-ruling Fianna Fail's poll ratings have nose-dived. In unlikely companion pieces in June in the Irish Times, both the head of the Irish Congress of Trade Unions and the incoming president of the Irish Business and Employers Confederation argued for increased government spending and investment.

And in March, an open letter signed by 28 leading economists and analysts implored the government to change course.

They warned that the harsh cuts risked killing demand and growth. Tax revenue would go down, and public debt would rise as a percentage of GDP, worsening Ireland's financial picture and touching off potentially more cuts, in a vicious cycle.

In the meantime, the deficit is set to rise because of the government's commitment to a $40.8-billion bailout package for its ailing banks.

"All the wrong options have been pursued," the letter declared.

Defenders of the government's actions say it didn't have much choice. Ireland couldn't afford inaction, especially after deficit troubles in Greece sparked fear of national default and a debt crisis across the 16 countries that use the euro, backers of austerity say.

"What would have happened to Ireland if it hadn't done it? I think that there, you'd be in the Greek situation," said John FitzGerald, a professor at the Economic and Social Research Institute in Dublin.

Officials trumpet recent data showing that Ireland emerged from recession, the last Eurozone economy to do so, with 2.7% growth in the first quarter of this year.

But the growth came almost entirely from exports. The domestic economy continued to contract, making the end of recession a phantom for most Irish.

"We're coming out of it, but we're not coming out of it because of anything in particular that the government has done well," said Stephen Kinsella, an economics professor at the University of Limerick.

"The reason we're doing so well is that demand for our manufacturing products is up from the rest of the world."

The rising unemployment rate has led to an increase in emigration, a specter that has long haunted Ireland.

Over the 12 months ending in March, as much as 3% of the workforce left the island, said FitzGerald, though that includes out-of-work Eastern European immigrants going home.

"My father once told me, in a very revealing moment, 'You know, you're the first generation of Irish people in 800 years that didn't have to emigrate,'" said Kinsella, who is 32.

"The cost of the profligacy of the boom years will be the loss of an entire generation, again."

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