The European financial system was on the edge this week with bankers demanding more cuts from economies already ravaged by austerity measures.
Ireland, Portugal and Greece are all struggling to pay off their deficits.
Fear that they might default means bankers are insisting on ever higher interest rates before loaning them money.
Attention is focused on Ireland. The government now has to pay 9 percent interest on its borrowing, and the European Union and the International Monetary Fund are demanding further cuts in return.
For now, instead of taking a bailout, the government is simply pledging more cuts—for free.
Unemployment in Ireland is already half a million, around one in seven of the adult population. An average civil service worker has seen a £50 a week wage cut.
The latest plan means the government will slash £5 billion from its 2011 budget deficit—expected to be introduced next month—and a further £7.6 billion over the following two years.
Ireland is the clearest example of a country whose response to the crisis has been to slash wages and services while throwing money at the banks.
Irish banks have already borrowed £110 billion from the European Central Bank.
The Irish economy was dependant on property speculation and multinational tax breaks. Now the rest of the economy has been paying for that collapse.
Morgan Kelly, Professor of Economics at University College Dublin, argues that Ireland’s decision to bail out its banks has left the country insolvent.
“This £60 billion bill for the banks dwarfs the £13 billion in spending cuts now agonised over, and reduces the necessary cuts in government spending to an exercise in futility,” he said.
“As a taxpayer, what does a bailout bill of £60 billion mean? It means that every cent of income tax that you pay for the next two to three years will go to repay Anglo’s [Irish Bank] losses, every cent for the following two years will go on AIB, and every cent for the next year and a half on the others.
“In other words, the Irish state is insolvent—its liabilities far exceed any realistic means of repaying them.”
The Irish government says its upcoming budget will be more vicious than previously planned.
There is the serious possibility of the Fianna Fail/Green coalition government falling apart as it relies on the votes of independent TDs (MPs).
Cuts decrease demand, as people have less money to spend. This hits the state’s tax income, and so the state moves to make even more vicious cuts to recoup the money.
The Irish government says it can survive until next year without borrowing money. Its latest idea is to use up the national pension fund to pay its bills.
But the German government hinted last week that some part of any bailout would have to be funded by investors. This was quickly withdrawn because it upset the markets.
They stabilised briefly after European Union finance ministers promised that investors would not be liable for any losses if the Irish economy was bailed out.
Governments are worried that nervousness about the “peripheral” eurozone economies will prove contagious, and could spread to Italy and Spain, the third and fourth largest economies in the eurozone.
A default by any member of the euro would likely trigger a chain reaction, encouraging others to cancel their debts.
That is what the bosses of Europe are frightened of. But whether the Irish economy is bailed out by the EU or the IMF it is Irish workers who will be expected to foot the bill.