Ireland’s austerity measures and spending cuts is a model that all European countries should adopt – or is it?

About three years ago, Ireland was granted 85 billion Euros by the Eurogroup and the IMF. As a part of the deal, the government of Ireland was obliged to take over all liabilities of the country’s banks to prevent an economic collapse.

Later, on a panel of the premiers, the current Prime Minister of Finland Jyrki Tapani Katainen said: “The Irish model is the one we all need. I don’t see that we have any choice… there is no short cut to heaven.” For some time now, Ireland’s implementation of the austerity package has been considered a role model for the rest of the Eurozone.

By measures which include increasing the state pension age and cutting public sector jobs and pay, Ireland turned 10 years of budget deficits into a surplus. David Begg, the general secretary of the Irish Confederation of Trade Unions, says: “We were the poster child for globalisation. Now we are the poster child for austerity.”

Recently, the Financial Times called Ireland’s minister of finance one of the best in Europe. Irish banks can borrow again on the open market, and the interest rates on sovereign bonds are rapidly falling. Indeed, that can be an indicator of the faith international capital has in the country’s future.

Added to this, Ireland is still a heaven for international companies searching for low taxes. On one hand the austerity measures seem to be working. The country’s budget deficit fell, unemployment rate is also slightly down. What is even more important: Ireland has avoided downgrades by Fitch and S&P, unlike many others.

But despite S&P reaffirming Ireland’s ‘BBB’ rating, it did not change its negative outlook. The agency explained that negative outlook is justified by the high risks to the stability of the financial sector and “uncertain growth prospects.” At the same time, according to Fitch, negative outlook also persist in countries like Belgium, France, Italy, Portugal, Spain and not least the United Kingdom.

So let us not forget that Europe is in deep need of a success story. The truth is, it is not all sunshine and rainbows. The economy is still weak, the growth the country is experiencing now is mostly due to the substantial fall in the labor cost.

Due to the small domestic market, almost all manufacturers are exporting to the Eurozone, the United Kingdom and the United States. Those destinations have the big problems of their own and probably even more to come.

Without further substantial economic growth, it will be impossible to reduce the government deficit and debt in the future. And without further reforms, the crisis could start all over again.

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The possibility of the European Economy inviting the double dip recession is almost certain. Experts say Greece will not be able to pay all of its debt. The fate of Europe and European Economy depends on how effectively countries entangled in debt crisis mitigate its impact.

European leaders, and especially leaders of devastated public finance systems, have lost sleep in order to keep the pulse of their economy beating. They are on the brink of collapse that might potentially drag-back the world economic growth rate to lowest in a decade.

The International Monetary Fund (IMF) and European Union (EU) have been attempting to keep the country solvent to avoid another recession hitting already weak global economy. The most outrageous shock will be on the EU banking industry as a whole, since European banks parked heavy doses of money into sovereign debt in the region.

Of all 17 nation bloc of Europe, exposure of France to Greek debt is $56.7bn, German exposure is $33.9bn, and the UK is $14.6bn. The EU and IMF agreed on 110bn Euros of bailout funds for Greece last year and again this year in July a further provision of 109bn Euros was agreed upon.

In July, European leaders agreed to provide an additional 109bn Euros bailout to Greece as it again came on the verge to default. Even so Greek Economy never settled on to that and situation got much worse. The problem with Greece, Italy, Spain, Ireland, and Portugal in a broader sense, is that they all were living beyond their means.

Over the last 5 years, the fiscal gap had been drenching wider and wider. All these nations had been spending far from revenue which led them to put reliance on debt, and because of this, the debt balloon is so big that it will possibly burst. According to Gary Jenkins, the head of fixed income research at Evolution securities, the timing of a Greek default remains in the hands of the troika (EU, ECB, and IMF), and it is difficult to believe that it will pull the plug at this stage.

Louise cooper, Market analyst at BCG Partners, shared his opinion on the situation. “I’m not sure that more austerity will help, which is troika demanding. What is needed is deep structural reform, which neither the Greek electorate or political class seem to have much appetite for.”

A recent report included a plan to eliminate 25,000 public sector employees hired last year, but according to spokesman for the European commission, Amadeus Altafaj-Tardio, new austerity measures aren’t on the table but negotiations are underway for full-fledged compliance with earlier agreed measures.

With drastic drop in public expenditure on various socio-economic fronts there has been wide-spread anger and violent protest in Greece so far this year. Greek default may sky-rocket cost of borrowing in the region and potentially Europe may face credit crunch which will be greatest hindrance to weak economies of the region.

If Greece somehow manages for an orderly default that might push repayments a decade ahead so confidence in the region might not get shaken completely or otherwise trust in the euro zone may be shattered forever. In its semi-annual World Economic Outlook, IMF gave a statement saying, “Global Activity has weakened and became more uneven; confidence has fallen sharply recently; and downside risks are growing.”

The Fund further said, “Greek default already affecting the world economy. Coupled with the economic slowdown in the United States and the impact of the Japanese earthquake, Europe’s debt crisis is putting the global recovery at risk.”
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