Leading article: Ireland on the wrong road

Share
Related Topics

Europe has had its Greek tragedy. And the continent now seems to be experiencing an Irish one too. Ireland has taken the course urged by outsiders since it plunged into recession two years ago. The state immediately guaranteed the debts of its giant banks when their reckless loans to the Irish property sector began to default. And in the following months, the government cut public spending drastically to convince the bond markets that Ireland was serious about reducing its ballooning public deficit. Rather than rioting, the Irish public stoically accepted the need for austerity. If Greece was the black sheep of the continent, Ireland was the model pupil.

But Ireland has not been rewarded for doing the "right" thing. The Irish sovereign cost of borrowing remains as high as that of Greece and Spain as bondholders remain unconvinced, despite Dublin's austerity drive, that there will not be a default. Unemployment remains high. The deficit has not fallen. The latest statistics show that the Irish economy contracted again in the second quarter of 2010. And yesterday the Irish finance minister, Brian Lenihan, was forced to announce a further multi-billion euro bailout for its still sickly banks.

The time has come to ask whether the Irish government is on the right path. Ireland's public finances are being crucified by the state's open-ended commitment to its insolvent banks. One of the reasons it remains so expensive for Ireland to borrow is that bondholders can see how much private bank debt Dublin is underwriting.

Mr Lenihan is adamant that those European banks – including Britain's – which lent to Ireland's banks should not be asked to bear any pain as the country cleans up after the bursting of its vast debt bubble. But surely the time has come to consider a restructuring of these delinquent banks' debt in order to ease the strains on the Irish treasury. Some creditors of insolvent banks could see their bonds convert to equity. Others could be forced to take a "haircut" on their original investment (in other words accept a lower return).

As for the deficit, there is no doubt that Ireland must bring down public spending – it cannot borrow 14 per cent of its gross national product indefinitely. But the rapid consolidation upon which Dublin has embarked is crushing demand in Ireland and making the private economy even weaker. It might well be more sensible for Ireland to tap the emergency borrowing on offer from Brussels (the European Financial Stability Facility) and perform this fiscal correction over a longer period, giving the economy more time to absorb the necessary pain.

This change of course would come with risks. Getting tough with bank creditors might result in a panic flight of capital. And the Brussels funding would come with unattractive strings attached. Yet this needs to be weighed against the risk of maintaining the present course. Ireland is suffering gravely under its government's existing policies. And with the nation locked into the fixed exchange rate of the euro and with the rest of Europe now embarking on an austerity drive too, an export-led recovery for Ireland is looking increasingly unlikely. Furthermore, without a robust recovery, it is hard to see the losses of Ireland's banks stabilising.

Mr Lenihan has brought itself some time by borrowing enough money to see the Irish state into next year. The Irish government needs to use this time to reconsider its options, in particular its decision that the Irish public should absorb all the pain resulting from the folly of Irish and European bankers. If the map to recovery proves to be wrong, it makes no sense to continue following it. The sensible response is to find a new map.

React Now

Latest stories from i100
iJobs Job Widget
iJobs General

Recruitment Genius: Junior Sales Apprentice

£15000 - £19000 per annum: Recruitment Genius: This is an opportunity to join ...

Recruitment Genius: Sales Executive - OTE £20,000 - £60,000

£20000 - £60000 per annum: Recruitment Genius: This is an exciting opportunity...

Recruitment Genius: Telesales Team Leader

£18000 - £22000 per annum: Recruitment Genius: This is an exciting opportunity...

Ashdown Group: Linux Systems Engineer - Linux, Windows, Cloud - Central London

£40000 - £48000 per annum + 10% bonus & benefits: Ashdown Group: Systems Engin...

Day In a Page

Read Next
 

If I were Prime Minister: I would ramp up Britain's spending on science

Paul Nurse
A family remain in the open for the third night following the 7.8 quake in Nepal  

Nepal earthquake: Mobs of looters roam the camps and the smell of burning flesh fills the air, but still we survive

Bidushi Dhungel
Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

How a costume drama became a Sunday night staple
Miliband promises no stamp duty for first-time buyers as he pushes Tories on housing

Miliband promises no stamp duty for first-time buyers

Labour leader pushes Tories on housing
Aviation history is littered with grand failures - from the the Bristol Brabazon to Concorde - but what went wrong with the SuperJumbo?

Aviation history is littered with grand failures

But what went wrong with the SuperJumbo?
Fear of Putin, Islamists and immigration is giving rise to a new generation of Soviet-style 'iron curtains' right across Europe

Fortress Europe?

Fear of Putin, Islamists and immigration is giving rise to a new generation of 'iron curtains'
Never mind what you're wearing, it's what you're reclining on

Never mind what you're wearing

It's what you're reclining on that matters
General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

Chuka Umunna: A virus of racism runs through Ukip

The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
Yemen crisis: This exotic war will soon become Europe's problem

Yemen's exotic war will soon affect Europe

Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
Marginal Streets project aims to document voters in the run-up to the General Election

Marginal Streets project documents voters

Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

The real-life kingdom of Westeros

Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
How to survive a social-media mauling, by the tough women of Twitter

How to survive a Twitter mauling

Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

At dawn, the young remember the young

A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

Follow the money as never before

Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

Samuel West interview

The actor and director on austerity, unionisation, and not mentioning his famous parents
General Election 2015: Imagine if the leading political parties were fashion labels

Imagine if the leading political parties were fashion labels

Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence