The agreement of the new Irish government’s programme is prudent and realistic. It should be acceptable to the European Union and the International Monetary Fund which are jointly providing funding for the Irish economy. It accepts the tough budget targets agreed for 2011 and 2012. While it delays, in principle, the date to bring the deficit down to 3 per cent of gross domestic product by one year to 2015, it will only be in two years that the extension will finally be decided.
So the parties have accepted a difficult “road map” that risks creating deep unpopularity over time. But, while for the moment, there is a hint of greater optimism for the future in the air in Ireland, there is no denying the austerity required. That is more difficult to accept because it follows a period of unprecedented growth. The Irish budget deficit is running at 12 per cent of GDP and the Irish gross debt is 95 per cent of GDP. On the present trajectory it will ultimately rise to 113 per cent in 2014 and may ultimately reach 120 per cent or slightly more as it did in the terrible years of the 1980s.
It is under these circumstances that on November 21 last year the outgoing government applied for a loan from the EU and IMF and a €67.5bn external facility was provided. The interest rate payable on the loan is 5.8 per cent although the funding cost is 2.9 per cent. This differential is exorbitant. It is also probably unsustainable having regard to likely growth rates. Far from helping to solve the problem it is therefore likely to exacerbate it. There is talk that it may be reviewed at the March ministerial meetings in the EU and it certainly should be. It is worth noting in this context that the British and Dutch loans to Iceland in December 2010 have an interest rate of 3.2 per cent and these loans are over a longer period. Also the balance of payments support by the EU commission to Hungary and Latvia does not have a penalty premium such as is to be paid by Ireland.