Cash-strapped Ireland tests limits of austerity

By Shawn Pogatchnik

Associated Press

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

"The problem with our austerity budgets is that we're trying to hit a moving target, and every cut and tax hike moves the target further away. I don't see how these austerity budgets ever end," he said.

Ireland's most recent consumer confidence survey last month recorded a precipitous drop as citizens reflected worries about their declining net pay and job security, mortgages in negative equity, and tougher times expected to come.

Austin Hughes, chief economist at KBC Ireland, a Belgian-owned bank that is one of Ireland's main mortgage providers, said the country faces a make-or-break 2012. If the economy doesn't grow sufficiently, he said, people will increasingly reject the whole rationale of austerity.

"Ireland started battling its downturn in 2008 before virtually the rest of the world. As we face into 2012, we're battling this sense of dread, that this fight against debt could go on forever. The risk is it's going to tax people's willingness to make further adjustments," said Hughes, who co-authored the consumer confidence report.

"People rightfully wonder: How bad will property taxes get? How much higher will the other charges go? How bad will the cuts in public services be? We've been living with too much certainty for too long," he said.

"With each austerity budget the government extends this sense of hope that we're coming to the corner, that the worst is over and things are about to get better. And at each stage that hope gets snatched away."

Ireland's exceptional exposure to the economic fortunes of its two major trading partners, the U.S. and the United Kingdom, appears to be the key to pulling Ireland out of its doldrums — or its Achilles heel, if those two economies don't generate their own growth.

Multinationals in Ireland, chiefly American companies attracted by an unusually low 12.5 percent rate of corporate tax, generate more than 18 percent of Ireland's entire GDP.

The trouble is, those companies making goods for sale overseas provide just 7 percent of Ireland's jobs, according to estimates by McWilliams. So even as these companies' exports boost GDP, their actual economic footprint on the ground in Ireland is far less.

"When Ireland's GDP rises, it doesn't mean anything to the real people of Ireland. It means Pfizer pumped out more Viagra last month," McWilliams said, referring to one of Ireland's most high-profile U.S. drug companies and exports. "And frankly, the level of erectile dysfunction in North America is hardly a firm basis for growth in Ireland."

Perhaps the most striking aspect of Ireland's economic fall has been the relatively low levels of public protest.

Commentators credit Ireland's post-Famine experience of poverty and emigration, its tradition of close government-labor union relations, and its exceptionally high levels of property ownership as disparate reasons why the country's shrinking work force keeps reporting to their jobs.

Smith, the Dublin butcher, and Larkin the mechanic are both bracing in their own ways for a tougher 2012. Both imagine an alternative Ireland where enraged workers riot in the streets, but both doubt it will happen.

Larkin is living paycheck to paycheck with nothing left over for savings. His partner takes care of their 3-year-old child at home, and another baby's on the way in March. The home they bought in 2006 with a €270,000 ($350,000) mortgage is worth less than half of that now.

The auto shop has had to lower prices to keep penny-pinching customers coming in. Its newest competition includes shops that sell imported, used German tires — too worn down for German roads, but still legal in Ireland — for half the price of new ones.

One of his friends has just given up on Ireland and joined the 1,700 on average who leave the country each week. Part of him would love to join his friend overseas.

"If I had nothing tying me down, no mortgage, I'd be on that plane to Australia as well," Larkin said.

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