Brussels, 22/11/2010 (Agence Europe) - On Wednesday, the Irish government will unveil a four-year austerity plan to rein in the public deficit and bring it back below the 3% of GDP cut-off point by 2014. The plan will slash public spending, raise taxes and restructure the banking industry. It will be used to meet the strict conditions attached by the European Union to its financial aid of nearly a hundred billion euro. Ireland's official request for aid was made on Sunday evening and immediately endorsed by Eurogroup and the ECOFIN Council.
The Irish austerity plan will include measures to reform the banking industry and thereby restore confidence in the Irish public purse and the solvency of the country's financial industry. The plan will be re-examined each year in the light of the economic situation and aims to make €15 billion-worth of savings by 2014, including €6 billion in 2011, in order to bring the deficit back below the Stability and Growth Pact cut-off point in four years. Ireland's public deficit currently stands at 32% of GDP (in 2010) because of the enormous bailout of the banking system.
According to reports in the Irish media, the plan will slash public spending by €10 billion by reducing minimum pay (from €8.65 an hour to € 7.65), slashing welfare spending (by 10% over four years) and scaling back the civil service.
Various tax measures aim to net an additional €5 billion, including the introduction of a property tax and taxing some civil servants' pensions. Ireland will try to keep its company tax at the current competitive rate of 12.5% which it sees as crucial to its former economic boom. Countries like Germany and France are not happy about the Irish company tax rate, seeing this very low rate as symptomatic of Ireland not playing fair within the eurozone. The new French European Affairs minister, Laurent Wauquiez, said in Brussels on Monday 22 November 2010 that if countries ask others for aid, then it makes sense for that to apply to all levers, both income and expenditure, but adding that taxation is a matter of national sovereignty.
An increase in the Irish tax burden is unfortunately very likely, commented a spokesperson for EU Economic and Monetary Affairs Commissioner Olli Rehn, adding that although Rehn believes that Ireland can no longer be a low-tax country, he does not have any particular measure in mind. Ireland has always fought against harmonisation of company tax in Europe and at the time it was trying to get the population to vote in support of the Lisbon Treaty, it was assured that taxation was a matter of national sovereignty.
Irish Prime Minister Brian Cowen said on Sunday that Irish banks would be considerably scaled back so that they gradually return to a firm footing. At the Annual Research Conference 2010 organised by the Commission on Monday, Rehn said that the Irish structural adjustment programme would include a “contingency capital fund” to support any future capital requirements by Irish banks. A series of measures would be introduced, like deleveraging and restructuring to enable the banks to continue to fund the real economy. Unable to raise capital on the inter-bank market despite the public bailouts, Irish banks are currently totally dependent on cash from the European Central Bank (ECB).
In February 2010, the European Commission gave the go-ahead for Ireland to set up a National Asset Management Agency (NAMA) to manage the toxic assets of financial institutions established in Ireland (see EUROPE 10088). The Commission also authorised the bailout of Anglo Irish Bank, Allied Irish Bank and Bank of Ireland.
How much EU aid exactly? The exact content and scope of the EU aid package for Ireland will not be revealed until the end of the month and the Irish government is refusing to give any exact figures. The aid will be below but close to €100 billion. On Monday, the chair of the Eurogroup, Jean-Claude Juncker, said that the EU aid would be less than €100 billion and the first tranche might be paid out in January 2011. The governor of the Irish central bank, Patrick Honohan, said last week that he expected a loan of several tens of billions of euros at an interest rate of around 5% (see EUROPE 10259). Considering aid for Ireland to be in its own national interest, the United Kingdom will be chipping in towards the aid package, but the details of the UK aid have not yet been decided.
Where will the aid come from? Olli Rehn commented on the Irish aid package: “In the context of a joint programme EU/IMF, the financial assistance package to the Irish state should be financed from the European financial stabilisation mechanism (EFSM) and the European financial stability facility (EFSF), supplemented by bilateral loans to be negotiated by EU Member States. The United Kingdom and Sweden have already indicated today that they stand ready to consider a bilateral loan”.
The European institutions' section of the aid package, the EFSA has funding of a total of €60 billion available, use of which has to be endorsed by a qualified majority vote. The inter-governmental section of EU aid comprises national guarantees of up to €440 billion to be released upon unanimous backing from the participating counties. It would take the EFSA between five and eight days to raise the funds on the market once a member state's request has been accepted by the ECOFIN Council. The IMF may provide up to €250 billion in aid.
How would the aid be mobilised? Discussions between Ireland and the Commission, the ECB and the IMF are continuing. Rehn said that the talks might be concluded at the end of November 2010. Once the formal talks have been concluded, the Irish government will formally endorse its economic adjustment programme, which will then need to be approved by Eurogroup and the ECOFIN Council based on an assessment by the European Commission and the ECB. Each individual country providing aid would be required to endorse their country's section of the aid package.
ECOFIN Council agrees to Ireland's request for aid
On Monday, the ECB's Governing Council accepted Ireland's official request for aid, pointing out: “The European Union and euro-area financial support, together with the IMF financing, will be provided under strong policy conditionality, on the basis of a programme negotiated with the Irish authorities. We are confident that this programme will contribute to ensuring the stability of the Irish banking system and permit it to perform its role in the functioning of the economy”.
On Sunday, Ireland officially asked for aid to help it deal with financial and budget problems. Brian Cowen explained that the Irish government had made a request to the European Union and the request had been accepted. He was speaking at an emergency meeting of the government to examine the outcome of informal talks on an aid package that had been ongoing since Thursday with representatives of the Commission, the ECB and the IMF (see EUROPE 10259).
In a statement published on Sunday after meetings by video, finance ministers from the EU and eurozone endorsed the Irish request: “Ministers welcome the request of the Irish Government for financial assistance from the European Union and euro-area Member States. Ministers concur with the Commission and the ECB that providing assistance to Ireland is warranted to safeguard financial stability in the EU and in the euro area. In the context of a joint programme EU/IMF, the financial assistance package to the Irish state should be financed from the European financial stabilisation mechanism (EFSM) and the European financial stability facility (EFSF), possibly supplemented by bilateral loans to be negotiated by EU Member States. The United Kingdom and Sweden have already indicated today that they stand ready to consider a bilateral loan. Given the strong fundamentals of the Irish economy, decisive implementation of the programme should allow a return to a robust and sustainable growth, safeguarding the economic and social cohesion and a comprehensive range of measures, including deleveraging and restructuring of the banking sector”. (M.B./transl.fl)