Vericool Finance

“People didn’t want to deal with it while the party was in full-swing, but now the music has stopped.  We’ve lost a fortune,” observed U2’s guitarist, The Edge, in a trenchant piece of economic commentary.  He’s not the only one mourning the dead Celtic Tiger.  Ireland’s descent into the financial maelstrom – after more than a decade as, ostensibly, Europe’s most successful economy – has hit the country for six.

Economic activity appears to have ground to a halt:  a new McDonald’s outlet in the west of the country is said to have been “inundated with job applicants”, including bankers, accountants and architects.  Amid growing public anger, the government finally bowed to the inevitable and announced an emergency Budget.  The country is now steeling itself for “savage” cuts in public spending and hefty tax rises.

With growth predicted to plummet by 8% this year and a budget deficit of 18bn Euros, Ireland’s finance minister, Brian Lenihan, had little room for manoeuvre.  Without these tough measures, Ireland’s fiscal deficit could have reached 13% of GDP this year – more than four times the EU limit.  Even so, he may have pulled the wrong levers.  Lenihan sees the future of the Irish economy in exports. Yet, as a member of the eurozone, Ireland can hardly devalue its currency to stimulate demand.
Moreover, by pulling this hard on the tax lever, Ireland may only succeed in exporting its best hope of recovery:  its talent.

There’s also a risk that by tightening public spending, Lenihan will trigger a further downward spiral in property prices and bank solvency. Credit rating agencies are already casting doubt on the survival chances of Ireland’s biggest banks.  Britain is not there yet, but the similarities between our banking and property-dependent economics are striking.  Given a few more failed government debt auctions, this could be the future that awaits us.

Ireland’s short, sharp shock approach to putting its finances in order may, in fact, be preferable to the long, slow march back to fiscal rectitude that Britain faces once the crisis is over.  But don’t expect Alistair Darling to follow Lenihan’s lead next week: The British Government is far too wedded to its policy of fiscal stimulus.  Yet, given the black hole in our accounts, the main question at the heart of the Budget is surely “how close the nation is to bankruptcy”.  The Government’s accumulated losses may yet send Britain into the IMF’s embrace.  To hear Lord Mandelson saying there should be no ‘stigma’ in taking a begging bowl to the fund is to know how delicately balanced the public finances truly are.