Saturday, November 27, 2010

Put People First

In the streets of Dublin, people demonstrate against severe cutbacks and tax increases with the slogan 'People before profits'. They are right to do so, as the austerity measures raise equity issues. The Irish government plans to cut minimum wage and slash 25.000 jobs in the public sector. But low tax rate for business is sacrosanct in Ireland.

Most of the 15 billion euro cuts will come from the welfare State and the working class. But these measures will not touch large businesses like Microsoft, Intel or Pfizer - which is true, they contribute to create hundreds of thousands of jobs and fuel exports. In fact, some multinationals which operate under Ireland's tax regime use complicated schemes to shift profits into and out of subsidiaries, allowing them to lower their effective tax rates.

The Irish government, which has lost popularity and support from citizens, will cut its deficit to less than 3% of its GDP by 2014 from 32% this year, that is a reduction of ten times (!). Ireland's total foreign debt, public and private is about 10 times its GDP. This situation is exploited by global investors to drive up borrowing costs, which are unaffordable under current growth scenarios. But, why should the middle class suffer from irresponsible behaviour of the Irish banks which will be saved in any event?

The question is whether there are credible alternatives which might alleviate the social costs of the crisis. Ireland - like Greece- should be allowed to restructure their debts - by extending their payments or reducing the principal (which means forcing banks to accept some debt write offs). If it is not the case, the Irish economy, which, from a poor peripheral country turned into one of the richest economies of Europe, will be condemned to stagnate over many years.

P.S: P.Krugman wrote on NYT a passionate article on the Irish crisis:
Yesterday, the EU Finance ministers agreed on an aid package of 85 billion € conditional upon an austerity plan. Borrowing costs will amount to 5,8%, higher than Greece (5.2%). The novelty is that debt restructuring might eventually be allowed as a last resort measure (A.M. 29/11). 

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