Ireland's European partners vowed on Friday to support the Irish economy through its fiscal crisis but said it was up to Dublin to get its public finances under control, starting with next week's emergency budget. Ireland's ballooning deficit, which led Standard & Poor's to cut its prized AAA credit rating, has fed doubts about how well the euro zone is equipped to handle such strains.
But the head of the European Central Bank (ECB) said the bloc was a safety net for its members. "The euro area belonging represents for any country ... a formidable help which should not be underestimated," ECB President Jean-Claude Trichet said at a meeting of eurozone finance ministers in Prague.
Reassuring signals from Europe on Ireland's fiscal situation have soothed international investors' fears and helped to lower Irish credit spreads in recent weeks. But Finance Minister Brian Lenihan still needs to convince European partners, investors and the electorate when he presents an emergency budget on April 7 that he has a credible strategy to bring the deficit below an EU limit of 3 percent of Gross Domestic Product by 2013.
"We are convinced (that) to restore confidence, to attract investors, to create the conditions for a sustained recovery of the Irish economy, one of the necessary conditions is to start the fiscal consolidation that will restore medium- to long-term sustainability of Irish public finances," Trichet said. Ireland's deficit ballooned to 3.7 billion euros ($4.9 billion) in the first quarter of this year, a tenfold increase on 2008, as tax revenues, overly dependent on a bubble in the property market, shrank by nearly a quarter.
Lenihan has warned that the shortfall could hit 12.75 percent of GDP for all of 2009, easily the highest in the EU, unless action is taken. Dublin is expected to raise income taxes, widen the tax base and cut public spending on Tuesday. But a previous target of keeping the deficit to 9.5 percent of GDP this year looks unobtainable due to the fragile state of the economy and a lack of time to raise revenues this year.
Prime Minister Brian Cowen warned on Friday that the emergency budget, the second in six months, would not be a silver bullet. Investors will instead home in on government plans over the medium term. Ireland's central bank advised the government on Friday to concentrate on cutting public spending, which has risen at an average 11 percent in each of the past three years, rather than raising taxes, which could further sap consumer demand.