Ireland's best way forward is sticking to austerity and paying its debts

The new Irish government may think that changing its taxation strategy - which has helped to make Dublin a stop-over for many international corporations - is too high a price to pay.

After more than a week of negotiations, Ireland has a new government and can begin the long job of clawing its way back to economic health. The negotiations between Fine Gael and the Labour Party may have dragged on but they are nothing to what is to come between Ireland's and Europe's leaders.

Talks about a "restructuring" of Ireland's debts will become far more urgent in the light of comments last week from the European Central Bank president that euro-zone interest rates may have to increase next month to put a brake on rising inflation.

The jump in costs that Ireland would face, should base rates go up, would put further pressure on the country's politicians to achieve the impossible.

Both parties succeeded in the polls after promising to renegotiate the terms of a €67 billion (Dh341.43bn) bailout by the EU and the IMF.

Before the elections, Enda Kenny, Ireland's next prime minister, was talking of securing a reduction to the average rate of 5.8 per cent charged on the EU loans.

During the campaign, Irish politicians also spun somewhat fanciful yarns that senior bondholders, not covered by the state banking guarantee, could be forced to take a haircut on their investments.

Since the elections, however, Olli Rehn, the European commissioner for economic and monetary affairs, has made it clear that renegotiating is not in the cards.

The bailout has provided harsh medicine for the Irish people, who are now living with sharp cuts in public sector pay and a reduced minimum wage.

Domestic demand has fallen by almost 20 per cent since the start of the crisis and unemployment is rising.

The country's problems continue to deter investors from putting money into the country. Benchmark 10-year Irish bonds traded at 9.36 per cent last week, near their all-time highs since the introduction of the euro, illustrating how unattractive this paper remains.

While Irish voters might have liked the idea of forcing nasty bondholders to take a hit, it was never a very practical solution. For a start, a large proportion of the debt outstanding from the banks is held domestically.

Ireland's central bank has confirmed that Irish banks owe bondholders more than €63bn, but about two thirds of the bonds are either guaranteed by the state or are secured on specific assets.

European institutions have been opposed to forcing losses on senior bondholders, fearing the knock-on effect of such a move across the euro zone.

Angela Merkel, the German chancellor, last week repeated Germany's opposition to any renegotiation of the bailout package that was agreed on last autumn.

But even if there were flexibility, Europe's leaders would extract a high price. In their sights is Ireland's ludicrously low, and uncompetitive in European terms, corporate taxation rate.

But the new Irish government may think that changing its taxation strategy - which has helped to make Dublin a stop-over for many international corporations - is too high a price to pay.

When the sum owed is as big as €67bn, changing the interest rate is never going to help as much as paying down the principal.

It is not only Ireland's politicians who have to convince voters on financial matters. Germany, Finland and the Netherlands, all fiscally conservative and with "triple-A" debt ratings, face key elections over the next two months. Fiscal prudence, usually an unpopular strategy for politicians to stick to, looks pointless if you simply cave in to Ireland's demands.

Sticking with the austerity plan will be tough, but Ireland's politicians, who have recently confronted bitter anger on the doorsteps, should not let Ireland's humiliation be completed by a sovereign default.

Ireland's future economic health may seem distant at present, especially since young people are emigrating again in search of opportunities their homeland can no longer provide.

But the country has faced hardships before and battled through. Only three decades ago the country recovered from debt levels similar to today's. And there are signs it will be able to do so again. Last year, Ireland was the largest net exporter among EU countries, excepting Germany.

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