This afternoon details of the Irish government\u2019s austerity budget have been released, and the details are enough to chill the blood.<\/p>\n
The Telegraph reports that the average Irish household will incur new taxes of \u00a33000, in addition to sweeping welfare cuts including 5% off child benefit and 13% off the minimum wage. In short, to make the \u00a35 billion savings needed to receive next year\u2019s EU-IMF bailout installment, Ireland must dismantle its welfare state.<\/p>\n
It is hardly surprising given this that the austerity budget has proven divisive within the Irish Parliament. Following the Irish Prime Minister Brian Cowen\u2019s announcement of the budget and his acceptance of the EU-IMF rescue deal, the Irish Green Party withdrew support from Cowen\u2019s coalition government and called for an election. Cowen has ceded to this demand and scheduled an election for December after the budget, but for now Ireland\u2019s political future remains uncertain.<\/p>\n
In part this uncertainty is responsible for the currency market\u2019s less than positive reaction to the announcement of the bailout.<\/p>\n
EU finance ministers had hoped that confirming the bailout would reassure the markets that Ireland had begun the path to solvency, in particular the Irish banking sector. Instead, key voices inside Irish politics complained that they\u2019d had foisted onto them a bailout they didn\u2019t want, thereby unraveling EU intentions completely.<\/p>\n
However, political parties within Ireland opposed to the austerity budget ought recognize that these cuts have been a long time coming. Prior to the global downturn the Irish housing market grew at an explosive rate, fueling economic growth that was simply unsustainable. The IMF meanwhile perceives today\u2019s budget announcements to be the aftershocks of the last decade\u2019s unsustainable growth: not the beginning of a new recession.<\/p>\n
In short, though the cuts are deeply unpleasant for Ireland, they are the consequences of a banking sector that simply lent too freely. Today\u2019s austerity budget announcements are the symptoms of a market correction ten years in the making.<\/p>\n
In addition, it is unlikely the markets will begin viewing the euro in a truly positive light again until those nations in danger of insolvency report positive news. For instance, Greece arguably exacerbated negative feeling toward the euro by failing to meet EU targets for reducing its public deficit last week.<\/p>\n
EU officials expected a euro boost following the Greek bailout in May. However this didn\u2019t happen in part because the Greeks failed to use the bailout cash effectively. In turn, the Irish must demonstrate that the EU-IMF bailout has improved their solvency prospects before markets grow optimistic about the euro.<\/p>\n
In the meantime though, Ireland\u2019s political parties can improve the situation by demonstrating their commitment to today\u2019s cuts. This might reassure the markets in the short term that Ireland is committed to becoming solvent. The alternative for the parties is to continue fostering conflict among themselves, and pining for an economic heyday that no longer exists.<\/p>\n