Dublin to unveil deep austerity plan as Germany warns euro 'at stake'

November 24, 2010

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Source: EU Observer

EUOBSERVER / BRUSSELS - In a race against time, or at least against the 'bond vigilantes', the Irish government is to publish a stiff austerity plan on Wednesday afternoon whose drafting was supervised to by the EU-IMF troika.

The plan, which will involve €15 billion in spending cuts and tax hikes, is the sacrifice being demanded by the European Commission, the European Central Bank and the International Monetary Fund in return for tens of billions in loans aiming to recapitalise the country's bleeding banks and buttress public finances.

Reports have suggested the loans could amount to between €70 and €100 billion, but Irish public broadcaster RTE, which is close to the government, is reporting that the figure will ultimately be €85 billion.

Meanwhile, underscoring the time sensitivity of the Irish operation, Germany's finance minister, Wolfgang Schaeuble, warned the euro itself was threatened if the situation was not rapidly resolved.

As European stock markets plunged again on Tuesday, with the euro dipping two cents against the dollar and borrowing costs for Spain and Portugal rising again, Mr Schaeuble told the German parliament: "It's our common currency that's at stake."

According to a document published on the IMF website on Tuesday, the international lender headed by French Socialist Dominique Strauss Kahn is demanding Ireland cut welfare payments, introduce stricter benefit requirements and slash the minimum wage.

The 160-page austerity plan, which was sent to the printers on Tuesday, will likely see cuts in spending and tax hikes of some €6 billion in 2011 and a further €9 billion over the following three years.

The cuts in general in 2011 will be worth some four percent of GDP and over the four-year period, equivalent to a full 11 percent. Overall spending on welfare specifically will be reduced by 15 percent or a total of €3 billion over the same period.

The austerity will also include a reduction in the minimum wage of 10 percent and introduce measures to crack down on welfare fraud. The marginal tax rate will return to 42 percent, while tax credits will be reduced.

Low-income earners currently not on the tax rolls will have to start paying and property taxes and water charges will be initiated.

Property tax breaks will also be reduced, a move expected to raise some €750 million for government coffers.

Bank capital requirements will be raised from eight to 12 percent and Allied Irish Banks and the Bank of Ireland will be nationalised. Chunks of bad loans will attempt to be sold off.

The austerity plan must be submitted to Brussels for approval, with a formal letter of intent likely to be issued by the IMF early next week.

Separately, two eurozone members, Luxembourg and Slovakia came to the defence of Ireland's ultra-low corporate tax rate, saying a rise in the rate should not form part of the troika's conditions for the €85 billion loan.

Luxembourgish foreign minister Jean Asselborn told German paper Tagesspiegel: "The situation that Ireland finds itself in is already difficult enough ... We should be careful not to strangle Ireland. Ireland has already lost so much economically."

"And if we take away every attraction Ireland has for inward investment then things will only get worse. And the worse it gets, the more expensive will it get for Europe in the end."

And Slovak finance minister told reporters on Tuesday: "We don't agree with connecting Ireland's bailout with the question of taxes, we have to let Ireland decide how to solve this."