x Abu Dhabi, UAEMonday 24 July 2017

European markets sceptical about Irish cuts

Some economists think the austerity package will not allow the country to achieve growth rates sufficient to sustain recovery, even with the bailout.

European markets gave a sceptical reaction to the Irish government's latest attempt to slash public spending and raise taxes as the country prepares for an international financial bailout of up to €90 billion (Dh443.19bn).

Some economists thought the austerity package unveiled yesterday by the prime minister Brian Cowen and the finance minister Brian Lenihan would not allow the country to achieve growth rates sufficient to sustain recovery, even with the bailout.

"It doesn't seem all that realistic to me," said Stephen Lewis, the chief economist of Monument Securities in London. "It seems they're planning very stringent fiscal measures and yet they expect the economy to grow against that background. That seems highly unlikely."

The package involves slicing €15bn from the budget deficit over the next four years. Two thirds will come from cuts to public expenditure and the balance from tax increases.

It aims to bring down the Irish budget deficit from an estimated 32 per cent of GDP this year to about 3 per cent in 2014.

Over the same period, the government said it expected GDP to continue to grow at an average of 2.75 per cent a year.

"It's a staggeringly austere budget. The cuts are deep and it will hurt," said James Nixon, the chief European economist at Societe Generale.

"The main thing that stands out is that they still expect the economy to grow by 2.7 per cent over the next four years but it's hard to see how that can be true."

Mr Lewis said: "I think the euro will probably wait for the political reaction to this because the big question mark over the austerity plan is whether it gets through the vote in the Dail [Irish parliament].

"And as long as those concerns persist, I don't think the details of the plan are going to impress the market all that much."

An early rally for the euro on foreign exchange markets faded as fears resurfaced about the quality of sovereign debt in Europe's troubled peripheral markets. Many expect Portugal will be the next to be forced to go to the EU and IMF for financial assistance.

Standard & Poor's downgraded Irish sovereign debt from "AA minus" to "A"; still investment grade but with a negative outlook.

There was relief among some investors that Ireland has so far managed to avoid raising its corporate tax rates, which at 12.5 per cent are among the lowest in Europe.

International companies such as Microsoft and Hewlett-Packard have supported the Irish government's resistance to some European calls to increase the rate.

 

fkane@thenational.ae