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Tuesday, November 23, 2010

What Ireland's surrender means- in simple terms

As some of you might know or have heard, Ireland agreed to accept $110 billion bailout from the EU (European Union) and the IMF (International Monetary Fund).  But what does this mean and why does it matter?   The best way to answer those two questions is to explain in simple terms what the new Ireland will now become, and you can determine for yourself if it matters to you.

The $110 billion EU & IMF bailout means the following:

1)  Ireland is no longer an independent nation where its economic and budgetary decisions are concerned.  Perhaps in a sense, they lost their autonomy years ago when agreeing to join to European Union and accept the euro as its currency.

Think of it this way- in the US, we were once colonies.  And each state saw itself autonomous of the other- it printed its own currency and made trade pacts separately with one another.  When the US Constitution was ratified in 1791, that all stopped.  Currency was centralized and to be accepted in all corners of the Union.  The states were now secondary to the centralized Union and it took a civil war 80 years later to solidify that fact.

Europe used to be a group of independent nations- now they are states.  Perhaps an accurate way to describe them would be the 'Semi-United States of Europe'.  There are two powerful economic states (Germany and France) that have the most sway and everyone else is weaker.  In the past when a nation had financial difficulty, they'd play around with their currency, print more,etc...  Now that its a centralized currency, Ireland like Greece and Iceland before, was forced to accept the will of the EU and took the bank bailout money so the euro and the EU on the whole, would not collapse.  

2)  The agreement to a bailout means Ireland will go through austerity.  The taxes of its populace will rise while social services will decrease.  Perhaps in time their retirement age will go up as well and pension will be affected.  Ireland is also going through a mortgage foreclosure crisis similar to the US and no doubt austerity will mean mortgage rates will climb causing more defaults. All this will increase civil unrest and encourage political destabilization in the Irish state.

The most talked about aspect of this agreement and how it may affect Ireland is its corporate tax rate, which is extremely low in order to draw in foreign corporations.  Ireland's corporate tax rate (for those who actually pay) is 12.5%.  To give perspective, the average tax rate for the rest of the EU is 25% and the tax rate in the USA is 40%. Though Ireland's leaders have promised that this bailout will not affect that rate, they are outright lying to their citizens once again.  The rest of the EU will not tolerate Ireland charging 50% less taxes and now this bailout gives the means for the EU to step in and change that tax policy.

3)  American taxpayer money went towards the bailout of Ireland's banks.  Of the $110 billion that Ireland will receive, 50% will come from the IMF.   Of all the funding it receives, approximately 18% comes from the United States.  So 18% of $55 billion equals $9.9 billion dollars. This doesn't count taxpayer money used to bailout Greece or money that other nations in Europe and the rest of the world have received in the past.

4)  Ireland is not the last bailout-  Portugal and Spain are in very bad fiscal shape.  They will need bailouts too in the future, with Spain being potentially massive.   Also, domestically,  as I said before, the European states are no different now than American states.  Over 80% of the US states are deep in debt with California and Illinois the worst.  The US will have to bail out these states as early as this coming year, 2011.

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