Also here's a question to pick on: if Ireland's government could enforce their own fiscal policy instead of the EU's central bank, would they be more Keynesian than Austerian? I don't think so, but I've never been to Ireland! Anyway, read my report below for the scoop. Note the bibliography, as well. They were good sources for coming up with all the objective information
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Following a property bubble that began in late 2007 and burst in 2008, Ireland joined one of many nations in the worldwide financial crisis. The crash caused the housing sector to experience a decline of 35% in property values from 2007 to 2010. Like the US housing crisis, homeowners suffered severe losses in equity. Angela Merkel, along with German officials, spearheaded the move to persuade Ireland to accept a bailout. By November 2010, the European Union recommended that Ireland accept a bailout projected at €85B. Ireland’s government conceded and its prime minister Brian Cowen publicly announced on November 21, 2010 that they would accept the stimulus aid package.
Ireland’s government has already intervened by nationalizing its four major commercial banks, including Allied Irish Banks and the Bank of Ireland. Prior to the bailout, the country had a fairly low deficit – by the end of September 2007, it had been approximately €3.1B. Now, the deficit hovers between €20-21B. Despite the government insisting that public services cuts are favored over raises in income tax, the Euro Stability and Growth Pact’s target of having a reduced deficit of 3% of GDP by 2013 seems unlikely. €4B worth of new taxes and spending cuts – consisting of the layoffs of 24,750 public workers – has been announced and is speculated to go into effect by the end of the fiscal year.
Austerity has gained momentum as Irish taxpayers face further tax increases and budget cuts in subsidized public programs – education, healthcare, etc. Moreover, Ireland’s European neighbors - this including French finance minister Christine Lagarde - urge the government to raise the 12.5% corporate tax. According to a report by Goldman Sachs, “companies in Ireland face the lowest effective tax burden of the euro-zone's 12 larger countries.” (page number not given) Consumer confidence is in effect, at a low. Higher taxes, high unemployment rates, and plummeting income levels will not be conducive towards boosting spending.
Economists who have paid keen interest to the debacle of the “PIGS” countries, such as Paul Krugman, have shed light on the differences between Iceland’s and Ireland’s financial meltdowns. He argues that while Iceland could directly influence its native currency, the krona, by devaluation, Ireland cannot do so for the Euro. They have virtually no control over interest rates or the money supply, let alone monetary policy. Importantly, Iceland did not pass on debt to their taxpayers via default on bad loans. Ireland did the opposite by bailing out their banks. In accordance with IMF logic, private sector defaults tend to lead to market declines in external debt. In addition, Iceland implemented capital controls which limited residents from transferring funds out of the country. Krugman’s analysis confirms that Ireland’s government has little choice in deficit cutting, and that the EU – due to its regulations - must fashion its policy for Ireland, as oppose to the country self-prescribing its own economic policy.
With respect to the Euro and the foreign exchange market, the EU has been readily available to provide emergency credit lines to its members. The Euro hit record lows throughout this year, dropping along the dollar, which contrasted with record high bond yields. Yields on 10-year bonds added 31 basis points to 9.07 percent. Wary of the instability of the Euro, senior officials are now proposing that the €750B rescue net should be increased, if necessary. Portugal and Spain are next on the list of countries that may need a bailout.
Economics has an underlying goal of full employment of people and capital. Today, there is very little capital to be employed and jobs are being lost at a rapid pace. Increased emigration from Ireland is a bitter fact among many natives that are now forced to leave their home country in search of work. Irish immigration in America is up 25% from last October (here is a relevant article). Austerian policies are politically popular, but will not work in fighting deficits; or at least, the plan at which the Irish government has is bound to have little effect in restoring consumer confidence. Prior to the acceptance of a bailout, Ireland’s government officials speculated as to whether defaulting and restructuring would be a better choice of action. By accepting the bailout, they have now passed the point of no return.
Bibliography
Finfacts Team. "Irish Exchequer Deficit in First Nine Months of 2007 at €3.1 Billion; Shortfall on Tax for the Year to Be between €1 and €1.5 Billion." Finfacts Ireland. 2 Oct. 2007. Web. 26 Nov. 2010.
Clarke, Jody. "Irish Property Crash: Is Ireland Heading for Recession - MoneyWeek." Investing, Investment Advice, Financial News & More - MoneyWeek. 3 Oct. 2007. Web. 25 Nov. 2010.
"Metronews - Article." Metro- Choose Your City. 23 Nov. 2010. Web. 27 Nov. 2010.
Alderman, Liz. "Ireland Unveils Austerity Plan to Help Secure Bailout." The New York Times. 24 Nov. 2010. Web. 25 Nov. 2010.
Brussels, Traynor In. "Ireland Bailout: Fears Mount That Eurozone Fund Is Too Small | Business | The Guardian." Latest News, Comment and Reviews from the Guardian | Guardian.co.uk. 25 Nov. 2010. Web. 25 Nov. 2010.
Czuczka, Tony. "European Ministers Hold Ireland Debt Crisis Talks at G-20 - Bloomberg." Bloomberg - Business & Financial News, Breaking News Headlines. 12 Nov. 2010. Web. 25 Nov. 2010.
Juergen, Baetz, and Eddy Melissa. "Merkel, Sarkozy Want Quick Bailout for Ireland - Yahoo! News." The Top News Headlines on Current Events from Yahoo! News. 25 Nov. 2010. Web. 25 Nov. 2010.
Krugman, Paul. "Eating the Irish." The New York Times. 25 Nov. 2010. Web. 26 Nov. 2010.
Horobin, William. "French Finance Minister: Ireland Should Use Taxes In Deficit Cutting - WSJ.com." Business News & Financial News - The Wall Street Journal - WSJ.com. 23 Apr. 2010. Web. 26 Nov. 2010.
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