A letter to Santa Claus from Ireland at Christmas

People pictured lining up for social welfare benefits in Dublin’s Bishop Square during the summer

Dear Santa,
I know I haven't written to you in a while. Well, okay, it's been over 50 years.

You may be surprised to be hearing from me after such a long time.   But I'm writing to you this Christmas because I'm desperate.  I don't know who else to turn to.

You see, even if I had the money, the things I want for Christmas can't be bought in the stores.  You're my only hope.   So here's my list (and I've checked it twice):

1. Debt forgiveness;
2. An interest rate cut;
3. A longer loan term;
4. A referendum (in case you can't get the first three items).

Debt forgiveness is the present we all want for Christmas in Ireland this year, Santa. I know it doesn't sound as exciting as an iPhone 4S (or whatever the latest gadget is).

But it would mean more to us here than anything else because it would mean more of us would be able to pay our old cell phone bills or our grocery bills or our mortgages.  We might even be able to buy a new iPhone at some point in the very distant future.

At the moment most of us here are struggling just to survive.  The main reason for that is the financial squeeze we are suffering to service our massive national debt.

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We're being  hit with higher taxes and lower state services, and there are years of so-called austerity budgets ahead of us which will make life here even harder in the future.

Debt forgiveness would lower the vast amount of money that is being sucked out of Ireland every year now to service our debts.  These repayments are so huge that the squeeze is killing our already depressed economy which is now back in recession.    

Right now we're trapped in a bailout program that is designed to keep us afloat long enough for us to get our budget back in balance. At present we're still spending close to a third more than we raise in taxes.  We're cutting back spending as fast as we can to bridge the gap but it's a painful process, one that will take at least three or four more years.

In the meantime, because no one else will loan us any money, we have to take the bailout money from the EU-IMF to keep going.  And the condition for getting that is a program to get our budgets back under control by 2015.

We are continually being told by the EU and the IMF and even by our own politicians that if we stick with the austerity program for another few years everything will be OK.  Eventually.

But will it?  I'm not so sure.

The fact is our national debt is so huge it's pretty obvious to me we will never be able to pay all of it back and still have a country left.  It's simply too much.

We could cope with the sovereign debt we have run up, which comes to a bit over €100billion.  But it's the €200 billion in debt owed by our banks that is the problem.

Although we had no idea what we were taking on at the time, we gave a state guarantee to our banks in 2008 to stop them going bust and that has turned their debts into our state debt.    

So give or take a few billion, we are in the hole for around €300 billion.  And since we are still in deficit -- and will be for the next few years at least -- we are adding to the pile instead of reducing it.

To start paying back our overall debt we need to have budgets that are in surplus.  This year, we managed to reduce our deficit by around €3 billion, and we'll be doing roughly the same each year up to 2015 at least, when we should be back in balance.

That has been -- and will be -- very painful for everyone here, whether they are paying taxes or on welfare.  But as you can see, it's only a drop in the ocean.  At that rate it will take generations to pay off our debt.

Is anybody in Europe concerned about this?  Not really.   The crisis meeting of the 27 EU leaders in Brussels two weeks ago was all about saving the euro.

They're not concerned about us, beyond making sure that we continue to repay our debt.  Failure by us to do so would further destabilize the euro because a lot of our debt is owed to German and French banks.

These foreign banks lent billions to the Irish banks to gamble on the Irish property boom, making a lot of money while it lasted.   Now that the bubble has burst they should be sharing the pain, but instead most of the bondholders are being paid back in full.
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So far we have paid back around €70 billion and we will go on doing so as further tranches of bonds become due, using money we are borrowing from the European Central Bank (ECB) to do so.

Paying back out debts in full was part of the deal under which we were given the bailout money last year.

Burning bondholders was ruled out not just by EU leaders but by US Treasury Secretary Tim Geithner, afraid that it could precipitate another international financial crisis. We had to accept the deal because we had nowhere else to get the money to keep Ireland functioning.

And so we are now expected to grin and bear it, to keep cutting back so we can keep paying back the tens of billions we owe to foreign banks. It's obviously both ridiculous and unfair. But so far no one will listen to us.

A fair and reasonable amount of debt forgiveness is not the only present we want this Christmas.  We also need a cut in the interest rates we pay on our debt, and we need a much longer repayment period (like 50 years or more). Both of these would further reduce the burden on us in the years ahead and give us a chance at recovery.

The interest rate Ireland is paying on the billions we owe is still far too high.  After the state here guaranteed our banks in September 2008, we had to put billions in capital into them, all of it borrowed.

We had put well over €20 billion into Anglo and another small bank before the EFSF (the European Financial Stability Facility) was set up to provide cheap money to stop places like Greece going bankrupt. We missed out on the cheap money, and we're now paying far too much interest.

For example, we're paying over 8% to the ECB on around €30 billion that went into Anglo to repay debts.  And our bailout money from the EU and the IMF is also expensive, despite the recent rate cut.  It needs to be around 1% or 2% instead of the 4% or 5% we have to pay now.

The last Christmas present we want is a referendum.  Now we may or may not need a referendum to enable us to adopt the terms of the fiscal compact agreement reached two weeks ago at the summit of EU leaders in Brussels.

But the government should copy the Greeks and threaten to have a referendum anyway.  The government can then tell the EU that there is not a snowball's chance in hell of the vote being positive unless we get serious debt forgiveness, a major interest rate cut and lengthy loan extensions.

This might seem like a lot to ask for this Christmas.  But most of it would not be delivered until next year anyway.  And it's only fair that we should get it.

As the EU keeps telling us, we've been very good children this year so this is one present we deserve.  And we're only asking for what is right.

Santa, maybe you can have a word with all those  elves in Brussels.
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Ireland's position in Europe: between a rock and a hard place

Taoiseach Enda Kenny addresses a news conference in Brussels last Friday night 

The deal done last week between the countries of Europe to save the euro means that Ireland, by accident, finds itself in a difficult position.  We're between a rock and a hard place.

Or between the devil and the deep blue sea, the devil being the U.K. and the deep blue sea being Europe.
It's a critical juncture for us, one fraught with danger.  Uniquely among all the EU countries, the deal raises a fundamental question for Ireland because of our close ties with the U.K., the only one of the 27-nation European Union countries to veto the new agreement.

The British refusal to agree to the deal and its growing isolation from the rest of Europe as a result poses a real dilemma for us. No other country in the EU is as dependent on Britain as Ireland.
We share a border and a language, over a million of our people live in Britain and have free movement back and forth.

Britain is our biggest trading partner in Europe. We have broadly similar positions on economics, finance, regulation and many other issues that are high on the European agenda these days and, of course, for years our old currency, the punt, was the poor relation of sterling.

The only major difference between us in recent years was our decision to join the euro and Britain's decision to keep the pound and stay outside the eurozone.

But even with that, we have held common positions on many of the questions facing Europe, and we could always rely on each other for support.  Even when we didn't agree we would consult each other.  Britain may have been the devil in the past, the old enemy, but these days there is a special relationship between us.

Like us, Britain is an open, trading economy which opposes too much regulation because it strangles business.
In contrast, the two big European beasts, France and Germany, are more closed economies, with lots of regulation.  They are also strongly in favor of tax harmonization across Europe, which both Britain and Ireland oppose.

In our case, one reason is our 12.5% corporation tax rate which is a critical attraction for foreign companies setting up here and which French President Nicolas Sarkozy wants to end.

In Britain's case, they strongly oppose tax harmonization and similar goals because they see them as steps towards fiscal convergence and eventual fiscal union which they believe would undermine Britain's success as an economy.  In particular they oppose the FTT (Financial Transactions Tax) which is part of the deal and is to apply across Europe and which Britain believes would damage London's position as a global financial center.

That was the immediate reason why British Prime Minister David Cameron used his veto in Brussels last week, although there were many other reasons. The differences were really more about the vision of a future Europe rather than a single issue.

The effect, however, is that Britain is now more estranged than ever from the European Union, where it has always been seen as a luke warm member.  

So Britain's semi-detachment from Europe as a consequence of their veto last week is not good news for us.   Britain has been a leading member of the 27-nation EU, even though it had stayed outside the 17-nation eurozone, and its further isolation from Europe poses a big question for us.

Do we remain as a fully involved and committed member of the EU and the eurozone?  Or do we detach ourselves to some extent and stay close to Britain?

The answer, virtually unanimous among the experts here, is that we must stick with Europe.  But the same experts are also pointing out how the semi-detachment of Britain is going to make life much more awkward for us in various ways in the future.

For example, when the pressure comes on us to raise our low corporation tax rate as part of tax harmonization across Europe, Britain won't be the same strong voice standing on our side.

France and Germany have their own ideas about the future of Europe and about the pace of further financial and economic integration.  The only big player who took the same view as us, a more individual, free market view, was the U.K.  Now we'll be on our own, with maybe some support from a few small countries.

The main points of the "fiscal compact" deal agreed last week are not an immediate problem for us because, as we pointed out here recently, we are already nailed to the cross by the terms of our EU/IMF bailout.

The headline points in the deal, like the maximum 3% of GDP annual deficit and the maximum 60% debt to GDP ratio, are already part of the EU's agreed targets for states.

The target of cutting our budget deficit to 3% by 2015 is part of the terms of our bailout and is why we had such heavy cutbacks in spending this month in the budget for 2012.  And it's why even more severe cutbacks will follow here each year over the next three years at least.

The deal also gives much greater power to the center to impose automatic sanctions on countries that break the rules.  This can include Europe effectively taking overall control of the finances of individual states to force through savings.

That sounds horrendous, but it's exactly what the IMF-EU team do here every three months when they come to Dublin to check Ireland's books.

For states who fail to observe the deficit and debt rules in future there will be detailed scrutiny of budgets before they are spent, including proposed spending in individual departments.  The center (in other words France and Germany) will take control if unreliable peripheral states like Ireland or Greece get out of line.  

These are some of the points in the deal on compliance with the budget rules and some of the sanctions for those countries which don't meet them.

In our case, failure to meet these targets would mean our bailout money would dry up, so the new compliance rules are not a big deal for us, although they will be there permanently.

But there are more worrying changes to the voting system which would mean in practice that unless we had a big country on our side, in future we would not be able to stop the implementation of new fiscal rules and targets which we might not like.

That, for us, is the general problem with this deal. Without the counterweight of the U.K., it means that France and Germany together will have far too much say in what happens in the future of Europe.

The immediate problem is that the deal concentrates almost exclusively on the fiscal problems of Europe, the budget deficits being run by the weaker countries and the debts they are piling up as a result.  But that is not the only problem, and fixing it won't be enough to save the euro.

Sovereign debt is only half the problem.  The other half is the banks and the huge cash reserves that are required to backstop the euro.

Experts have suggested that at least a trillion euro is needed for this, but the deal last week does not come near providing that.  The introduction of the ESM (European Stability Mechanism) -- the EU's permanent bailout fund which will replace the present temporary set-up -- is to be in place by next July with around half a trillion available, the deal promises.  But who is to stump up the cash seems vague, so we will have to wait and see what happens.

A major complication in the deal reached last week is the legal situation.  Because of the British veto, the new deal cannot be implemented through EU structures.  It will have to be implemented outside the existing EU legal set-up built on treaties between the member countries.

Because Britain has to be bypassed, the deal will become a reality through agreements between the other countries, legal agreements outside the EU framework.

Initially we were told that the European Court of Justice would have a role in deciding whether countries were sticking to the targets in the deal; how that can be possible if this is all outside the EU structures is hard to understand.

In other words, in spite of all the exhausted back slapping after the marathon meeting in Brussels, what we have is far from clear.  What was announced after the meeting was just the headlines.

We are told that it will be March at least before the text that goes below the headlines will be ready for countries to sign off and implement.  Given the seriousness of the euro crisis, that seems very far away.

In the meantime, the markets may get jumpy, particularly when countries begin to pick at problems in the deal they see for themselves.

For example, one that has already cropped here is the future of the Irish Financial Services Center (IFSC) in Dublin.  If we have to pay the new FTT (Financial Transactions Tax) but the City of London does not, how many of the 30,000 jobs in the IFSC will migrate?  How much of the annual one billion euro in corporation tax we now get from this sector will be lost?

The legal quagmire that is opening up under this deal, in the wake of the British veto, may in the end be more serious than anything else.  Some legal experts are already suggesting that the deal will sink and vanish from view.  

It's a pity that cool heads and compromise instead of confrontation did not work out an agreed way forward that could have included Britain.  Where Sarkozy and Cameron are concerned, there's a pair of them in it, as we say here. Both have one eye on their own electoral futures.

All little Ireland can do in this mess is watch from the sidelines as the big boys make up the new rules. Dangerous times indeed.

Irish budget irrelevant because Germans own us anyway

Finance Minister Michael Noonan with a copy of the budget on Tuesday.

There is a mixture of resignation, fear and anger in the air here this week after our two-day budget.  So much had been leaked in advance there were no real surprises.

But even so, the difference between talking about cutbacks in state spending and actually implementing them is a major shock to people.  And of course it will be weeks before the cuts start to bite, which is when the real pain will be felt and public reaction will harden.

A couple of points need to be made before we start looking in detail at the cuts in state spending and the hikes in tax that have been announced.

First off, the budget on Monday and Tuesday was really just a sideshow to the main event which will happen in Europe this Friday as leaders gather for the final summit to save the euro and the EU.  
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It's going to be a week of intense negotiations, and the seriousness of the situation is underlined by the presence of U.S. Treasury Secretary Timothy Geithner, who is on a four-capital shuttle around Europe to emphasize that the stakes are enormous.

Europe has to get its house to stop the collapse of the euro. Failure is not an option, since it could trigger a catastrophic global recession, which is why the U.S. is so interested.

What's likely to happen is that EU leaders, particularly Germany and France, will insist that all EU countries accept that in future there will be much tighter central fiscal control in Europe.

What this means is that irresponsible countries like Ireland, Greece, Portugal, Spain and Italy will no longer have the freedom to borrow and spend their way into a crisis.  They will have to accept a new discipline that in effect will mean they lose the right to make big decisions about their own economic affairs.

German Chancellor Angela Merkel wants European Treaty reform which will introduce tough rules to keep national budgets under control and make progress towards a fiscal union between the eurozone states.

She wants a system which would bring countries which exceed the agreed limit for deficits of 3% of national income and the agreed limit for government debt of 60% of GDP before the European Court of Justice.   Presumably if countries were found guilty, the ultimate sanction would be expulsion from the eurozone and the EU.
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The German government does not think this can be achieved overnight.   Merkel has said that she sees it as a process which will take several years.  But the object for Germany is much closer fiscal control of individual countries by the centre.

In return for agreement to this kind of central fiscal supervision, Germany will continue to prop up the system and the weaker countries in particular.  It may even agree to Eurobonds, or something similar, which would spread the risk of lending to weak EU countries like Ireland across Europe.   But the German taxpayer is not going to agree to this unless discipline and control are imposed.

The first thing to be said about this is that Ireland is already there to a large degree.  The IMF/EU supervision that came with our bailout means that we have already lost our economic sovereignty.

We have to get approval for our budgets in advance to allow the IMF/EU to see that we are sticking to reducing deficit targets. So this would not be a huge leap for us.

Our present situation is supposed to be temporary, until we can borrow from the markets again.  But don't hold your breath.

There is a widely held view here that Irish people would reject by a vast majority any treaty proposal to take fiscal power away from our politicians and give it to the EU But given the way our own politicians have bankrupted the country, I'm not so sure.

Would we have had the disastrous property bubble if the EU was keeping an eye on us?  Definitely not.

If a proposal to cede control of overall fiscal limits to the EU but retain control of fiscal details is explained to people here, I'm not sure that everyone would vote against a treaty change of that kind.  Particularly if that is the price of continued support from the EU as we struggle to get our finances on to a sustainable level again.
The truth is we really don't have an option, and people here would realize that.

From a European perspective - -and particularly from a German perspective -- our ability to manage our own economic affairs has been proven to be inadequate, even disastrous.  And this latest budget does little to inspire confidence.

It is yet another example of the inability of Irish politicians to bring real reform to our system and to inject real incentive to get our economy moving again.  It is a further example of how deeply ingrained the dependency culture is here.  And of how unwilling we are to face up to reality and pay our way.

We have a huge annual budget deficit to bridge here over the coming years, but the progress in this budget was minimal, despite the outcry over the cutbacks and tax hikes.

Before the budget was framed the government parties had already agreed that there would be no cuts in basic welfare rates. And they are committed already under the ludicrous Croke Park agreement that there will be no further cuts in basic pay for state workers.  Which would be fine if we were not in crisis.

It would be fine if unemployment benefit here at €188 (plus €124 for an adult dependent and €30 for each child) was not almost twice as high as the rate in the U.K., including Northern Ireland.)  I'm not saying it's easy to live on this, but we are way out of line.

And it would be fine if teachers here, for example, were not being paid an average of 20 percent more than their counterparts in the U.K., with many other state workers enjoying pay levels that are similarly out of synch with other countries.

And it would be fine if the guaranteed pensions that state workers get were not being paid out of borrowing by the state, at a time when many private sector workers have seen their pension funds collapse in the markets and can't do anything about it.

There has been some effort in this budget to introduce a new approach, but it's tinkering rather than fundamental change.  And it's all accompanied by apologies rather than a clear statement that our present system of high spending and falling tax revenue can only continue in cloud cuckoo land.

The budget speech did point out that tax revenues fell from €47 billion in 2007 to €31 billion in 2010, a fall of one-third in just three years. Did state spending fall in line over the same period?  Are you kidding?

No, we carried on much as before until at last the markets wouldn't loan us any more and we had to go cap in hand to the IMF and the EU. Since then we have avoided turning Ireland into Greece by cutting state spending very slowly so that we can avoid riots on the streets.

This year's Budget will see €2.2 billion in cutbacks in state spending in 2012 (€1.4 billion in current spending and the rest in cancelled capital spending) as well as €1.6 billion in increased taxation.   It's a start and it will meet the deficit reduction target of 8.6% for the year. But it still leaves a very long way to go to reach the 3% deficit target by 2015.

Cutbacks penciled in for next year and the year after are higher and will be even more difficult to achieve without making fundamental changes rather just tinkering with a flawed structure.
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An example would be the children's allowance system here which is a universal payment made to all families regardless of income.  The monthly payments are huge by international standards, with €140 each for the first two children, €167 for the third and €177 for the fourth and subsequent children up to now.  The budget has standardized the payments at €140 each for all children. This has all the Catholic mothers up in arms, none of whom appear to have seen the movie Cheaper By the Dozen.  It has been characterized as an attack not only on our traditional values but on poorer families.

Which begs the question why parents who can't afford it go on having more kids.  But you can't ask a question like that in Holy Catholic Ireland.

A family with four children currently receives €624 each month and this will fall to €560 a month by 2013. It's not the end of the family here, which is what you would think listening to some of the reaction.

That's what years of boom time mollycoddling by the state can do.  It has made people here believe that providing for children is the state's job rather than the responsibility of parents.

The system should be means tested and limited to families living in real poverty, but so far the government has not been able to organize this, even though the present system costs around €2.5 billion a year and more than half the families with children don't really need the payments.

There are many other minor changes in spending in this budget.  For example, university fees go up by €250, but they are still one-third the level they will be in the U.K. next year.

There will be a household charge of €100 a year, the first step towards a new system of property tax to come in the future, but then every country in Europe except us has a property tax.

Fuel allowance payments to people on welfare will be available now for six months of the year instead of eight months, which may not be too difficult given the mild climate we live in.

And there is much more ... but almost all of it is minor adjustments to a very bloated system of welfare payments.

The system inflated during the boom as our politicians bought votes and in the process created a culture of entitlement and dependency which now makes facing reality much harder.   We’ve got a long way to go.

It's the same story with taxation.  As predicted, the budget did not increase basic income tax rates but the higher rate of sales tax went up by 2% on so-called luxury items like TVs.

In spite of the public outcry at the increase, the fact is that almost all essential items are still rated at zero or the
lower rate of sales tax.

The overall effect of this budget will be felt mostly by middle class families who will find the cuts and sales tax changes will cost them around €500 to €800 a year. It's not the best, particularly when things like oil and gas are soaring in price.

But it's the softest possible shift in our finances given the huge budget deficit we still have to close.

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