The IMF could be good for Ireland


Much of what is in the bailout conditions was expected. We all knew that massive cuts in spending and heavy increases in taxation were on the way.

But the detail of some of it is surprising. Like the specific targeting of Ireland's overpaid professionals -- especially the lawyers and doctors -- and the statement that their charges have to be driven down within nine months. This will be done by opening up the "closed shop" of the various professions so that people can get in more easily, and there will be much more competition.

Also interesting is the way the document talks about the sale of semi-state companies, with the proceeds being used to reduce the national debt.

The bottom line in the document is that the loans from the EU/IMF to keep the country afloat for the next four years will only be paid if the agreed targets are met, to the agreed timetable. That means fast action on huge cuts in government spending, no matter how painful.

It also means taking much more tax from those in jobs, especially higher earners. It's all about balancing the books as quickly as possible.

In fact looking over the agreement with the EU/IMF, it's hard to disagree with most of what it contains. Most of the details are changes that the Irish government has been promising for years, but never had the cojones to implement.

These changes are about shrinking a government and state sector that has become way too big and way too costly. They're about tackling the vested interests in Irish society -- from the €1,200 a week plumbers to the million a month developers -- who paid so little tax because there were so many loopholes.

Another of the vested interests here are the state sector workers, the only area of the Irish economy in which the unions are still all powerful.

The government has been terrified of tackling them and still clings to the doctrine of social partnership, a system which has meant no strikes but very high wages. State workers here earn far more than their counterparts in Northern Ireland, for example.

As tax revenue dried up over the past three years, the government tried to reduce the enormous state payroll bill by cutting pay slightly. The now infamous Croke Park Agreement with the state sector unions over a year ago was supposed to deliver further savings by greater efficiency. In return the unions were promised there would be no further pay cuts and no forced job losses.

Given the state of the country's finances, this was an incredible deal for the unions. But so far, in spite of the crisis, only minimal savings have been achieved.

Now the EU/IMF document makes clear that unless major savings are forthcoming within nine months, there will be major cuts in state sector pay. So no more procrastination.

The truth is that for the last few years, the government has been trying to deal with the spending and taxation issues that are tackled head on in this document. Now the "memorandum of understanding" with the EU/IMF published last week has done so at a stroke, without fear or favor. To that extent, it is to be welcomed.
In fact if we were only concerned with sorting out the state's finances, the budget deficit, the conditions outlined in the EU/IMF €85 billion bailout document would be perfect.

But the problem is that we are also trying to fix our banks, because two years ago the state gave an absolute guarantee to all depositors in our banks. That guarantee effectively transferred the private debt of our banks into the sovereign debt of our country -- a move that was, in retrospect, disastrous for the ordinary Irish taxpayer.

Fixing our banks as well as the state finances means our bailout money has to be much more than we can really afford to pay back. And that is why, although there was no immediate alternative to us taking the money and although many of the conditions in the agreement will be good for us, there are now big question marks over our future.

The interest rate we are being charged is penal, only marginally less that we were paying on the markets before we withdrew. And this adds up to a huge annual interest bill, billions that will have to come out of our tax revenue before we start to pay for services like schools and hospitals.

This will have a depressing effect on economic activity here, and it is open to question whether our economy can recover any time soon with a debt service burden that is so heavy.

The EU/IMF have nothing to say about this scenario, instead taking the optimistic view that we will recover quickly enough to pay all our bills and get back to a normal state.

They are not in favor of making the bondholders in Irish banks carry at least some of the burden, which would be one way of quickly reducing the €85 billion millstone around Ireland's neck. But that is one issue that is not going to go away whether the EU/IMF likes it or not.