Ireland is a country with delusions of grandeur

And it's not just this December's budget for the coming year. There will have to be cuts on a similar scale in the following three years if we are to live up to the promise to get the deficit back to the level that is acceptable for members of the European Union by 2013/2014.

This level is EU policy agreed by all the member nations, and failure to meet it would put in danger our ongoing funding from the European Central Bank that is now loaning us the money to keep going.

As the fat in state spending is cut away, it will get progressively more difficult in the coming years to find more things to cut each year. So although people here don't realize it yet, the truth is that we are faced not just with one very tough year but with four or five years when services and the standard of living in Ireland are going to fall by extremely painful amounts.

Some commentators here are desperately looking for a way out. But there is no alternative.

The union leaders argue that further pay cuts will drive down demand here and make our recession even deeper. That is true up to a point.

But exports are the life blood of the Irish economy, and our costs are way out of line with our competitors, mainly due to wages that soared here during the boom. Cutting pay here is essential to making us competitive on the international market again.

The unions also argue that pay rates are only part of the reason for the high cost of doing business here, citing other costs like power and transport. But if you look at electricity prices here, for example, they are way out of line with the rest of Europe, largely because the staff in the semi-state organization that supplies most electricity are paid huge salaries (workers in some power plants here are getting over 120,000 euro a year).

The other reason we are in such trouble is our version of the China syndrome. Look around you in Ireland these days and almost everything you see comes from somewhere else, very often China.

Nothing is made here anymore, because we can't compete. Our manufacturing industry has been wiped out by cheaper countries. Our supposed edge in the so-called knowledge economy has been wiped out by equally smart but much cheaper young information technology workers in places like Eastern Europe, India and, again, China.

Even more depressing is a visit to a supermarket here. All the usual household items are made outside Ireland.

But increasingly, a lot of what we eat comes from somewhere else as well. And again, the reason comes back to cost, and that comes back to the high wages which are the main legacy of the boom here, with very little in the way of productivity or ingenuity to back them up.

It's a gloomy picture. Of course, one could say the same about the U.S., China's biggest customer by far and also one of its biggest lenders.

The Chinese hold close to $1,000 billion in U.S. government bonds, so they have to keep lending to the U.S. because if America and the dollar collapses all that paper will be worthless and their biggest market will be gone. It's Catch 22, Chinese style.

The difference for Ireland is that no one would care if we went bust. So we can't go on borrowing like the U.S. is doing.

If we can get through this, at least we will still own Ireland. The way the U.S. economy and U.S. borrowing is going, the Chinese will own America.

Zai jian y'all.

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