Euro slides amid Ireland austerity fears

The euro struggled near a two-month low amid renewed fears that a number of nations in the Eurozone would follow Ireland and Greece into financial crisis.

Yesterday the EU approved Ireland’s four-year budget package designed to save 15bn euros (£13bn) through spending cuts and tax rises.

VAT will go up, income taxes will go up, there will be a new poll tax on property, a cut in the minimum wage, and the sharpest ever spending cuts in Irish history.

The plan is also believed to have the backing of the International Monetary Fund, which continues to examine how much of a bailout Ireland needs.

Negotiations on the EU-backed bailout continue with the rescue package expected to be worth about 85bn euros.

The austerity measures are designed to reduce Ireland’s budget deficit – the highest in he Eurozone – but some investors remain unconvinced.

Economics Editor Faisal Islam said the cuts would prove “vastly more regressive” than those in the UK, and one City analyst described them as “staggering austerity.”

Austerity fears

There are fears that the Irish government’s growth estimates are too optimistic. Compounding this uncertainty are further concerns that the government will not be able to push through the budget when it votes on 7 December.

Traders fear that the debt crisis could spread to other countries that have high deficits within the single currency zone. In particular Portugal and Spain are increasingly seen as in need of help.

Bond yields have risen to unsustainable levels and the Irish crisis has also undermined the euro.

Irish bonds, credit default swaps and stocks will likely prove most vulnerable to political uncertainty in the coming weeks, but the single currency and bonds of other fringe Eurozone borrowers such as Greece, Portugal and Spain may also move on Irish developments.

Portugal strikes

Yesterday Portugal’s biggest unions staged their first joint strike in more than two decades, in protest at planned austerity measures designed to shield the country from Eurozone contagion.

Portugal has suffered from years of low growth and waning competitiveness which economists say undermines its ability to ride out the debt crisis.

Even though the economy is growing this year, economists fear it will slide back into recession in 2011 as higher taxes and civil servant wage cuts of five percent bite into consumption.

Unemployment is already at its highest since the 1980s at 10.9 per cent and there are fears that this could rise further.

There are concerns that a wavering in the government’s commitment to new austerity measures could push up Portugal’s borrowing costs in the same vicious spiral that forced Athens and Dublin to seek rescues.