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Friday, March 4, 2011

EDITORIAL

The morning after in Ireland

Once again, while the world has been transfixed by events in the Arab world, legal but no less revolutionary change has been occurring elsewhere. For there is no word other than "revolutionary" that fits the Irish voters' rejection of Fianna Fail, the party that has dominated Irish politics since independence, in an election last week.

The dethroning of Fianna Fail was both expected and justified — the party's incompetence created one of the most spectacular economic crashes in modern history. The new government will be lucky to prevent the situation from deteriorating: Indeed, there is little reason to expect more from Dublin's new leaders.

Fianna Fail, a centrist nationalist party, has been in power in Ireland for 60 of the last 80 years, and ruled in one coalition or another since 1997. It presided over the birth of the Celtic Tiger, a period of 9.6 percent average annual economic growth that turned Ireland, a perennial backwater, into the second richest economy in the European Union.

But as former Prime Minister Brian Cowen explained, "the boom got boomier" and turned to froth and bubbles. Low interest rates, a heady and unaccustomed sense of optimism and an economy that relied heavily on the construction industry all helped fuel a spectacular increase in real estate prices — housing prices alone tripled between 2000 and 2006.

Not surprisingly, that state of affairs was not sustainable, and reality began to bite in 2007. The credit crunch that followed the global financial crisis of 2008 intensified Ireland's woes. It is estimated that housing prices have fallen about 43 percent since their peak. Ireland lost an estimated 150 billion euro in wealth in 2009 alone. Bad as that situation was, it was worsened when the Irish government in September 2008 decided to guarantee the debts of Irish banks.

That put taxpayers on the hook for the bad loans of the country's banks, a sum that is reckoned to exceed 100 billion euro — or nearly two-thirds of the country's GDP in 2009. Gross government debt has nearly tripled from 25.8 percent of GDP in 2006 and is expected to top 75 percent by the end of the fiscal 2011. Unemployment has gone from 4.2 percent to nearly 14 percent. Some 100,000 people are expected to emigrate over the next two years, out of a population of 4.3 million.

Voters are not sure whether to blame corruption or pure incompetence. A party in power for such an extended period of time is almost certain to lose its way, and the clubby nature of Irish politics yields relationships that other countries recoil from. Either way Fianna Fail was sure to get the boot. In last weekend's ballot, the party was gutted, losing more three-quarters of its seats, falling from 78 seats to 20 in the 166-seat Parliament. Fine Gael jumped from 51 seats to 76, and Labour came in third with 37 seats, adding 17 seats.

What is troubling, though not unexpected, was Fine Gael's inability to win an outright majority. It must therefore forge a coalition, mostly likely with Labour. But that will not be easy since the campaign highlighted deep divisions between the two parties on tax policy, public spending and how quickly the budget deficit can be reduced.

Agreement must be reached on a government by March 9, when Parliament reconvenes. Looming large over the negotiations is the EU summit that will be held March 24-25. Irish politicians will attend that meeting with two objectives. The first is renegotiating the terms of the rescue package cobbled together by the EU and the IMF last November which provided $115 billion to bail out the government while imposing a draconian four-year austerity program.

Mr. Enda Kenny, the leader of Fine Gael and the man tipped to become taoiseach (prime minister), has promised to renegotiate the terms of the deal, particularly the interest rate on the loan, a rate that exceeds that being paid by Greece.

EU officials say that is not likely. They want Ireland to raise its corporate tax rate, which is low by European standards. But sticking to that low rate is one of the few points of agreement between Fine Gail and Labour and among virtually all Irish, who believe that low rate has been key to the country's former economic success.

If Ireland has any leverage, it is in the form of a "nuclear option" — declaring a default. Doing so would expose European banks, particularly those in Germany that are among the main holders of Irish banking bonds.

The dirty little secret of the Irish bailout is that European money is going to pay continental banks. An Irish declaration that it would not pay its debts would shatter its credibility — but it would also rattle the eurozone as it would transfer Irish losses to European institutions. In these circumstances, renegotiation looks more appealing. It is a dangerous game of chicken, but it is an option.

Ultimately, however, Ireland needs a better regulatory framework for its banks, a more diversified economy and a more realistic assessment of acceptable growth. Citizens and politicians need to adjust to this new reality — politics as usual is no longer an option in Ireland.



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