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Cash-strapped Ireland tests limits of austerity

By Shawn Pogatchnik

Associated Press

Published: Thursday, Jan. 19 2012 11:55 a.m. MST

Dublin mechanic Tommy Larkin, 35, drains oil from a customer's car in his garage in Dublin Thursday, Jan. 19, 2012. Many Irish people are struggling to pay their bills and face a financial breaking point following four years of tax rises and spending cuts. Terms of Ireland's international bailout mean at least three more years of deepening austerity.

Shawn Pogatchnik, Associated Press

DUBLIN — Ireland is testing the limits for how much European Union-ordered austerity one country can take. Its four-year struggle to save its banks and tame a runaway deficit has already meant slashing thousands from the annual budgets of most households — and many Irish say they're close to breaking point.

"We're squeezed to the pips," said Tommy Larkin, a 35-year-old mechanic changing tires and oil on the double in northside Dublin. "I never had to watch my money in the good times, but that's all I do with my money now."

Across the road, butcher Sean Smith, 43, isn't quite as forlorn about his own family finances but is just as bleak about Ireland's financial future.

"We're under German rule, it's as simple as that, and we'll be paying them back forever," Smith said, referring to Ireland's loss of economic sovereignty since taking a bailout from the EU and International Monetary Fund 14 months ago.

On Thursday, EU and IMF chiefs monitoring Ireland's handling of its debt crisis left Dublin singing the praises of a government that has slashed its 2011 deficit to below 10 percent of GDP, ahead of the bailout plan's target.

Ireland has been cutting its budgets and raising a slew of taxes since January 2009 and, according to the EU-IMF bailout plan, still must cut billions more over the next three years just to regain a 2015 deficit of 3 percent of GDP, the maximum level permitted in the eurozone.

Middle-class wages have been cut around 15 percent, while the nearly 15 percent unemployed have seen welfare and other aid payments trimmed. The government has just raised sales tax to 23 percent, joint highest in the EU, imposing a new household tax, and planning new water charges next. Keeping a car on the road can mean an annual fee of anything from €160 ($205) to €2,258 ($3,045), while recent fuel-tax hikes have helped take gas above €1.50 per liter ($7.25 per U.S. gallon).

Many economists believe Ireland is trying to defy economic gravity by fighting a war on its own debt that, to succeed, will require strong economic growth alongside spending cuts. Austerity alone, the recipe so far, undercuts the hopes of growth by sucking money out of the economy.

The same formula of reforms centered on austerity is being applied across Europe and is championed by Germany's chancellor and leading voice in Europe's financial planning, Angela Merkel, as a way out of the region's financial crisis. Recession-hit Greece and Portugal, which have also been the recipients of bailouts, face severe austerity measures.

The proponents of austerity have pointed to Ireland as proof that it can work, but questions are growing over how much longer the country can keep squeezing money from its economy.

"If austerity don't work in Ireland, it won't work anywhere. And it can't work here if people are scared stiff of spending whatever money they have," said David McWilliams, Ireland's most prominent economic commentator, who foresaw the demise of the 1994-2007 Celtic Tiger economy as credit and property bubbles collapsed.

McWilliams noted that Ireland has an extremely flexible labor market by European standards, is quick to use its traditional safety valve of emigration to keep unemployment artificially low, and has built a lopsided economy dependent on the fortunes of nearly 1,000 foreign multinationals based here.

Despite these advantages, he said, Ireland still stands little chance of achieving the economic growth it needs so long as it's trapped in an EU-directed plan that takes progressively more money out of people's pockets.

"Search every economic textbook you've ever read and find the one that says cutting expenditure in the teeth of a recession will make the economy grow. It doesn't exist," McWilliams said.

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