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International News Title: Austerity Hawks Lose Their Celtic Poster Child What does a country need to do to make a success of the euro? The European Commission and the European Central Bank would say the recipe is simple: Cut your budget deficit, slash wages, keep taxes competitive, boost your exports, and live with austerity. There is just one problem: Ireland has been following precisely that formula and it hasn’t done much good. The government is being squeezed at a time when the cost of bank bailouts is soaring. Blame it on the banks. If there is one country that proves what a mess the single currency has become, it isn’t Greece, or even Spain or Portugal. It’s Ireland. When countries break the rules and then get into trouble, it isn’t that surprising. But if they stick to the rulebook and still run into as many problems, it suggests there is something badly wrong with the system itself. Last week, there was a stark reminder that Ireland is still a long way from market redemption, almost two years after the credit crunch burst the real-estate and asset bubble that had been building up in the country for most of the past decade. Credit rater Standard & Poor’s lowered its grading on Irish debt by one level to AA-, stressing the heavy cost of rescuing a banking system struggling to cope with the collapse of the property market. S&P estimates the cost of recapitalizing the banks will be about 50 billion euros ($63 billion). That’s almost a third of the economy. Ireland now has its lowest rating since 1995. Irish bonds plunged on the news. The spread over German bunds widened to a record. Budget Blowout It isn’t hard to understand why the decision was made. Ireland ran a budget deficit of 14.3 percent of gross domestic product last year, the largest of any euro-area country. The gap will narrow to about 11 percent this year, according to European Commission forecasts. That is a slight improvement, but hardly enough to reassure the bond market. There is a mountain of debt building up and the economy remains in a terrible state. Over the past two years, it has shrunk about 10 percent, one of the worst recessions in the developed world. There isn’t much sign of a bounce back, either. The Irish central bank predicts the economy will expand 0.8 percent this year, a figure it revised up from the 0.5 percent contraction it forecast in April. Maybe it will, and maybe it won’t. Either way, it is a weak revival for what used to be one of the fastest- growing countries in Europe, and one that based most of its growth on exports. Hard Times And yet, Ireland has been exemplary in its austerity drive. Public-sector salaries have fallen by an average of 13 percent. Taxes have been raised where necessary, but not in a way that will hurt business. The Irish have been willing to tighten their belts and adjust to hard times. There was no sign of the street riots, strikes and political protests that took place in Greece. Ireland is doing exactly what it has been told it should be doing. It is following the path laid down for Greece, Portugal and Spain, and doing so with admirable self-restraint and discipline. There ought to be some reward for all that effort. But there is very little sign of it. There can be little question that the single currency has contributed to Ireland’s woes. Unlike Greece or Portugal, the country wasn’t looking to the euro to modernize a backward economy before it was introduced. The Celtic Tiger, as it was known, was doing great all by itself. Nor, like the Italians, was it attempting to swap a permanently weak currency for a stronger one. The Irish pound was doing just fine. Massive Bubble Ireland had one of the most successful economies in the world when it joined the euro in 1999. All it has got out of monetary union is massive financial and real-estate bubbles, the collapse of which will scar the country for a generation. The European Commission and the ECB should be looking hard at the Irish experience. They should suspend the limit on budget deficits for five years until there is some sign of economic growth. There should also be exemptions from paying for the Greek bailout -- it’s crazy for the Irish to borrow money to give to a country that is in the same boat. A tactful exit from the euro should be used as a last resort. If austerity doesn’t work for Ireland, it is hardly going to help Greece, Portugal or Spain. The whole experiment with monetary union is doomed if the euro’s leaders don’t jettison their simple recipe.
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