The Irish question

The severity of the Irish crisis was laid bare by the comments made this week by the German economy minister, Wolfgang Schäuble: "The euro is at stake." Without descending into hysteria, the European economic authorities must urgently come up with a plan to deal with the panic attacks in the markets, which has ledto Spain's country risk premium breachingthe mark of 250 basis points - such excessive borrowing costs instill fears over the solvency of Spain. The euro is at stake because the stability of Spanish debt is too. The real risk for the euro will be revealed by the reaction of the markets to the Irish bailout plan. Right now, Europe is on fire, from Lisbon to Dublin.

The Irish austerity plan is limited to cutbacks in times of crisis. The measures are far reaching (spending cuts of 15 billion euros until 2014), with social cuts, a reduction in bureaucracy (25,000 public sector jobs are to go), and tax rises, in particular value-added tax. This is not to mention the sale of the banks, who sparked the crisis in the first place. The markets will give the plan credibility depending on the rise in tax revenues and the new government's ability to deal with the situation.

The fears of the Spanish government and of Schäuble stem from a complicated hypothesis: if the Irish plan and Angela Merkel don't manage to calm the markets, the debt crisis will spread to Portugal and Spain; and by that point it won't be possible to contain it. Merkel has the power to say the magic words, with the permission of the German Constitutional Court, which will (for the moment) calm the storm: the 85-billion-euro rescue fund will not depend on a deduction from private creditors. Merkel's revelation that she intended to make those who created the crisis pay part of its cost (private funds, speculators, investment banks) was premature; but the analysis is correct. Of course, it would be desirable that the European Central Bank took on a new lease of life and continued buying up debt.

But the drama is centered on Spain, given the abyss between the threat hanging over public and private debt and the apparent impassivity of the government. In spite of the official spiel, pointing out that Spain is not Ireland (which is obvious, albeit only true thanks to the solvency of the big Spanish banks), it is true that both countries have something in common. For example, dependency on external savings. Spain's external deficit, high unemployment and scant prospects for growth are all damaging. But there are two more factors that cast an even greater shadow for investors. The first is a weak fiscal structure, which collapses at times of recession. The other is the mediocre management of the situation by the government, which announced reforms for the pension system, only to later put them off and then to condition them on an agreement with certain social groups. It has also delayed introducing reforms to the financial sector and the labor market. An added burden has been the poor political quality that investors detect in the opposition Popular Party. A change in government would not offer any guarantees for global investors.

Whether we like it or not, the Irish crisis is now an issue for Spain. Public and private finances can save themselves from the fire if they immediately announce reforms for pensions; the immediate execution of the savings bank mergers; and a political commitment to reduce the debt and costs in the autonomous regions. Promises have to be kept, and the government has dealt clumsily with those it made on pensions, the labor market and financial reforms, to the point that it has lost a lot of its credibility.