Ireland tests limits of austerity

For two long years, the Irish have suffered through harsh government cutbacks and tax increases that have taken a fat chunk out of their take-home pay - painful medicine to avoid national bankruptcy.

After all that, they're ready to cut some more.

Workers in other European countries with financial troubles are striking or rioting at the mere announcement that cutbacks are needed to dig out of the government debt crisis engulfing the continent. But the Irish are not protesting.

Instead, they are doubling down with more austerity.

Some economists say the decision to keep cutting back is a mistake because it will remove the stimulus of government spending from the economy, deepening and dragging out the economic slowdown. That, in turn, would reduce tax revenue, defeating the purpose by making Ireland's debts harder to pay.

But many people here think if they can get debt under control, their business-friendly economy could rebound ahead of Greece and Spain, financially troubled eurozone members that have higher business costs and more red tape.

Irish optimists cite exceptionally strong links to the giant US economy, Ireland's flair for exporting, its rock-bottom corporate tax and smoother labour relations.

There is a long way to go. Irish unemployment has tripled in two years to a 16-year high of 13.4 per cent. The Government's 2009 budget deficit of 14.3 per cent of gross domestic product was highest in the 16-nation Eurozone - higher even than Greece, which needed an international bailout to avoid bankruptcy.

Alarming increase

Ireland's debt-to-GDP ratio has skyrocketed from 25 per cent at the end of 2007 to 65 per cent at the end of 2009 - less than in many other countries, but an alarmingly quick increase that is forecast to continue.

More than that, Irish workers have seen incomes sink amid rapidly imposed tax hikes and benefit cuts.

All workers above minimum wage have suffered a new levy on pay cheques equivalent to four per cent to eight per cent of their gross pay.

Ireland's 350,000 public servants, who have the country's most stable jobs and guaranteed pensions, have been hit much harder through pay cuts ranging from five per cent to 15 per cent and a pension levy equivalent to about 7.5 per cent of salary.

Now, Prime Minister Brian Cowen promises three more hard-cutting budgets through 2013 that are expected to include new taxes on property and water. Despite this, austerity shock has made Ireland more attractive.

Wage and state-regulated energy costs are down, layoffs have meant a stronger pool of recruits, and slumping property prices make Ireland less expensive for new arrivals.

"That's all helped to make Ireland a more competitive location," he said.

And Irish unions are not Greek unions, which have held six national strikes in recent months.

Ireland's two million workers - a third of them unionised, mostly state employees - have mounted few protests. Since 1987, Ireland has negotiated national wage-pact agreements designed to promote gradual raises and minimise strikes.

As new income taxes slash salaries, union leaders have preferred to keep talking with the government and the major employers group, the Irish Business and Employers Confederation, in hopes of softening the blows rather than preventing them.

Still, some economists think Ireland's course is wrong.

They argue that slashing government spending in a downturn will just make the slowdown worse and increase unemployment.

One sceptic is American Nobel laureate Paul Krugman, who recently warned that Ireland's agony has not, in fact, reassured markets despite widespread belief that it has.

"The reality is that nothing of the sort has taken place," Krugman wrote. "Virtuous, suffering Ireland is gaining nothing."

Trinity College Dublin finance lecturer Constantin Gurdgiev said that point of view ignores a key difference between Ireland and the United States.

"Tiny Ireland is one of the most open economies in the world, but it has no power to dictate to bond markets or print money. We simply do not wield anything like the kind of power to run up deficits and debts that America has," he said.

"America can spend its way out of problems. We cannot... So we must cut, and we must reassure our lenders."

Despite the acquiescence of the public, the price has been high.

More than 3,000 businesses have gone bankrupt across Ireland since 2008, and 240 construction firms folded in the first five months of 2010 alone.

Survival tactics

While export-driven GDP is growing, the locally-based economy remains flat.

Few professions have been harder hit than architects, who flocked to Dublin during the long property boom.

But even here, innovators are finding survival tactics.

For architect Anthony Brabazon, who two years ago oversaw a four-man practice at a prestigious Dublin address, business ran dry in 2009 as clients began failing to pay. Brabazon laid off two architects, negotiated an early end to his office lease, cut fees by 30 per cent and moved his firm into his home.

Then Brabazon developed a business plan for the recession: a flat-fee surveying and advice service called Help My House. He recruited 18 other job-hunting architects across Ireland to do €150 troubleshooting visits to clients. The business, designed to overcome people's fear of hiring an architect, is growing.

"In a recession, there's still tons of money out there. People are just afraid and are sitting on it," he said with a wall map of Ireland, marked with his network of architects, in the background.

"There's something like €80 billion sitting in Irish banks right now. Whenever people get their confidence back, God willing, this country will be in good shape again."

- AP