Ireland's fiscal austerity earns praise amid pain

By Henry Chu Los Angeles Times

DUBLIN -- The outside world applauded in December when Ireland unveiled its harshest budget in a generation. Stinging cuts and higher taxes were needed to tame a runaway public deficit and give the limping Celtic Tiger some of its roar back, officials said.

Three months later, Ireland has become something of a poster boy for good behavior in bad times, held up as an example to Europe's other debt-laden economies, particularly Greece.

Analysts say that by biting the bullet, the Irish government has managed to hang on to a degree of investor confidence and lay the foundation for an eventual return to economic growth.

But with unemployment rising, public servants taking home smaller paychecks and social services getting pared, residents of the Emerald Isle are finding that the cost of being a role model is steep.

Ask Fergal Greene. A public school teacher, he has seen his salary shrink by about $500 a month since the beginning of last year. The child-benefit allowance he receives from the state has also been reduced.

With a wife and two young sons to support, Greene, 39, is "down to counting every euro" by month's end.

"These are serious cuts, in one of the most expensive countries in Western Europe," he lamented, sitting at the kitchen table of his modest row house in a Dublin suburb. His mortgage is $1,350 per month, nearly half his take-home pay.

The sacrifices imposed on Greene represent a tiny part of the $5.4 billion that the Irish government gouged out of its budget in December. Officials say they had no choice but to inflict painful cuts in order to start bringing down a whopping deficit of about 12 percent of gross domestic product, far in excess of what is allowed under rules for the 16 countries that use the euro.

Although international markets greeted the austerity plan favorably, as an indication that Dublin was serious about reining in its deficit, opinion at home hasn't been so kind.

The government's approval ratings have plumbed new depths, brought low by voters who squarely blame their leaders for a humiliating bust that saw one of Europe's fastest-growing economies contract by more than 7 percent last year. Ireland has not been in such difficult straits since the 1980s.

"We've been pretty unpopular at least going [back] to the autumn of 2008," Martin Mansergh, a minister in Ireland's Department of Finance, acknowledged in an interview. "I wouldn't say deservedly so, but I suppose people . . . re-elected us to office in 2007 in the hope that we would protect them from a hard landing. Mainly because of international factors, we were not able to do that."

The economy should start growing again by the end of this year, officials predict. And by acting so quickly and decisively, Mansergh said, the government has been able to shore up some investor confidence in Ireland, which is crucial for keeping the country's borrowing costs down.

Indeed, economists around the world cite Ireland as a positive counterpoint to Greece, which is also grappling with a debt crisis that has threatened the stability of the euro.

Where Athens concealed its financial woes for years, Dublin copped early to its deficit and took emergency action to stop the rot. Greece's credibility has been shredded; Ireland has managed to repair some of the damage to its reputation and maintain its independence.

Public anger over Ireland's budget cuts, though strong, has not triggered a wave of social unrest. In a widely reported comment after an initial slash in spending last April, Finance Minister Brian Lenihan said other European nations were amazed by his compatriots' temperate reaction and that similar cuts in France would have set off riots.

"You're dealing with a population which is very well-informed," said John FitzGerald, a professor at the Economic and Social Research Institute in Dublin. "People are furious with the government, but they know there isn't a choice."

Ireland's opposition parties also have accepted the idea that savage cuts must be made, though they disagree with the ruling Fianna Fail party on exactly where the ax should fall.

Greene, the teacher, is worried that those who will suffer are society's most vulnerable, as the social safety net frays after years of irrational exuberance and consumerist excess.

It outrages Greene that the government that is now firing teacher's assistants who work with children with learning difficulties is the same one that spent nearly $15 billion to rescue a group of ailing banks.

And the pain is far from over. The government has pumped fresh billions into its troubled banking system. And despite the forecast of a return to growth, Mansergh warned that the government budget due at year's end, and perhaps the one due at the end of 2011, would probably be tough as well.

"Look, we're in charge, we have to take responsibility," he said. "If we have successfully defended our economic independence, then I think we will be well-satisfied.

"After that, it's up to the people to pass their verdict," Mansergh added. "If they wish to punish us for past sins, that would be their privilege. But I don't think we want to have compounded any mistakes we made . . . by failing to do the necessary in the situation in which we find ourselves."