The Irish government is teetering on the brink of collapse.
In a humiliating about-face, the Irish Taoiseach (prime minister), Brian Cowen, yesterday accepted a European Union bailout package that he had claimed Ireland neither wanted nor needed. Protesters immediately decried the “shameful” stitch-up between Irish bankers, politicians, and the EU, and attempted to storm the parliament. The Green party walked out of the ruling coalition, the opposition party demanded an immediate election, and members of the prime minister’s party are considering a no-confidence motion. All of this controversy has horrified the European Union, which assumed the Irish would simply accept the over–$100 billion deal as a fait accompli.
It seems as though Cowen’s countrymen have failed to see the need for the tax-increasing bailout that’s being pushed on the country by eurozone big boys primarily to protect profligate Mediterranean states. European leaders intervened because they feared that “crisis contagion” from Ireland would drive up bond yields in weaker eurozone members like Portugal, Spain, and (whisper it) Italy — the euro domino theory. Since the EU can’t bail out the entire Iberian Peninsula, let alone Italy, such contagion could lead to the dramatic disintegration of the euro.
Moreover, it’s an opportunity for high-tax European states to level the playing field. Throughout the go-go late ’90s, the Celtic Tiger grew by 6 percent or more each year as low taxes — including a 12.5 percent corporate tax rate, which is among the lowest in Europe — attracted over 1,000 multinational companies, including Intel, Pfizer, Microsoft, and Google. (Wasteful EU subsidies to Ireland, meanwhile, mostly went into the shrinking agriculture sector, though some also went to building infrastructure in the rural west.)
For decades, these successful low-tax policies infuriated continental Europe, where politicians attacked Ireland’s “unfair competition.” Now, under the conditions of the bailout, middle-class Irish families will lose their tax credits and low-paid workers will be taxed. Also, as a French official has ominously remarked, the corporate tax “leaves room for progress.” France’s president, Nicolas Sarkozy was more direct: “Our Irish friends . . . have more room for maneuver than others, their taxes being lower than all the others.”
But unlike Greece, Ireland didn’t come to the EU begging for a bailout. Thanks to sharp fiscal consolidation over the last year, Ireland won’t actually need to sell bonds until the middle of next year — the government is fully funded for the immediate future.
Since the economic crisis, Ireland has tackled its problems head-on, cutting spending and forcing banks to come clean about their losses. Irish officials provided state backing for the banks’ bad debts, causing the country’s much-ballyhooed 32 percent budget deficit. Guaranteeing these debts may have been a mistake — it is unclear how much havoc would have been wreaked by an up-front haircut — but until recently, EU officials were praising Ireland as a “role model” and calling on other countries to “face up to their problems” in a similar fashion.
Ireland’s fatal mistake — the reason it finds itself in this ignominious position — was to adopt the euro. Joining the eurozone encouraged foreign investment, but left the Irish economy subject to interest rates set by the European Central Bank to suit the large German and French economies. Trapped in this euro-straitjacket, Ireland couldn’t raise interest rates to cool its overheating economy, and Irish banks piled into a real-estate bubble that has left them insolvent.
Of course, not all of Ireland’s troubles can be blamed on the euro. Better regulation could have reined in the reckless Irish banks, for example, and generous welfare provisions left the Irish budget dangerously dependent on property taxes. But the country’s bond yields have spiked because of the banks’ insolvency — not because of a Greek-style fiscal meltdown — and it’s hard to imagine that Irish monetary officials would have let the property bubble inflate to such dangerous proportions.
The EU bailout, if it sticks, promises to bring temporary relief to Ireland, but where will the buck stop? Bond-market vigilantes have already turned on Portugal and Spain: The spread between German and Spanish ten-year bonds — a measure of the relative riskiness of the governments’ debt — hit record highs Tuesday, and the spread between German and Portuguese bonds also rose. Also, Greek yields are higher now than they were before the Irish bailout. As Mohamed A. El-Erian, the CEO of PIMCO (an investment-management firm), said, “you cannot fix a solvency problem by putting new debt on top of old debt.”