Germany's Angela Merkel Leans On Irish to Fix Economy

Ireland has continued to insist that it will not have to tap into the EU fund, with Finance Minister Brian Lenihan saying this week that Ireland -- which has temporarily ceased issuing sovereign bonds due to the high interest rates -- has enough money to pay its debts through next April at least.

Still, investors are eagerly awaiting the details of Ireland's austerity program, set to be released this month. Ireland plans to cut €6 billion from its 2011 budget deficit and a further €9 billion in subsequent years. The country hopes to be able to reduce its budget deficit, currently at a whopping 32 percent of gross domestic product -- a figure that ballooned because Ireland had to include the one-off costs of bailing out its banks this year -- to below the euro-zone limit of 3 percent by 2014.

Ireland isn't the only euro-zone country seeing a rise in its sovereign bond yields this month. Portugal, Spain and Greece have all suffered from investor uncertainty about what a future EU debt restructuring mechanism might look like. Concerns are growing that tough austerity measures in Ireland, Greece and Portugal, in particular, might hamper future growth, further limiting those countries' ability to eventually pay down their debt loads.

"The focus is now shifting from fiscal consolidation towards economic growth," Carsten Brzeski, chief economist for ING in Brussels, confirmed to the Associated Press this week.

The renewed concern over European sovereign debt has once again spread to the euro. Despite the US Federal Reserve having announced plans to dump $600 billion into the US economy in the coming months -- a move which normally would have resulted in the dollar losing value against the euro -- the European common currency has actually dropped against the dollar this week. While the euro briefly climbed above $1.40 on the Fed's announcement last week, it is now at $1.37 and falling.

European Economic and Monetary Affairs Commissioner Olli Rehn has been doing what he can this week to throw investors off Ireland's scent. In Dublin on Tuesday, Rehn said: "You are a smart and stubborn people. Time and again you have proved you can overcome adversity. And this time, you do not face the challenges alone. Europe stands by you."

Still, even if the European debate about debt restructuring mechanisms has triggered this most recent round of sovereign debt panic, the onus is on Ireland to convince investors that it has a workable plan. Parliament is currently set to vote on Prime Minister Brian Cowen's budget on Dec. 7. But even though there is widespread fear that the crisis will be exacerbated if the budget isn't passed, the country's two major opposition parties have indicated they will vote against the budget. Cowen is deeply unpopular in Ireland, and a failure of the budget would almost certainly lead to new elections.

Last year, the Irish government already cut public spending by €4 billion, reductions which primarily hit public sector workers and social welfare recipients, although they were felt in all sectors of society. Many wonder where further cuts could come from. This week, labor unions have said they plan to hold a day of protest later this month.

Still, even if Cowen manages to push through his budget, there is no guarantee that Ireland's cost of borrowing will drop to affordable levels. Indeed, even EU money would include 6-8 percent interest.

"The interest rate would be high," John McHale, an economics professor at the National University of Ireland at Galway, told the AP in reference to EU funds. "And there would be huge reputational damage done to Ireland. So we might as well solve this problem ourselves."

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