By Mathieu Labrèche, Contributing Correspondent

The current mood in Ireland’s parliament, the Dáil, is one of anxiety and uncertainty over the future of the republic’s ailing economy. Its hallways are buzzing with sharp political talk and determined efforts to pull the country from full collapse by swallowing the bitter pill of outsider rescue.

On Nov. 28, 2010, eurozone finance ministers gave Ireland the green light to receive a substantial bailout package from the European Union and the International Monetary Fund. However, many in Dublin are grumbling about the humiliating loss of their long-cherished sovereignty and the concessions that must be made to salvage the economy, lower mounting sovereign debt and deal with a banking system gone bust.

Ireland’s Prime Minister, Brian Cowen, delivered a four-year deficit-reduction plan intended to stave off economic ruin. The plan introduces harsh measures such as an increase in income tax, lowering of the national minimum wage and deep cuts to the public sector. In doing so, the government aims to reduce Ireland’s 2014 deficit to three per cent of gross domestic product, the limit set for the single currency eurozone. To put things in perspective, this year’s deficit is projected to reach 32 per cent, a new European high.

Ireland’s boom and bust

Ireland’s story cannot be told without mentioning the slow and steady social and economic revolution that led to their experiment in “open-door” capitalism. In some ways, the situation in the 1980s was similar to today. The economy was sickly, public debt soared and high inflation and interest rates deterred investment. A gradual move towards secularism, regionalism and laissez-faire economics led the country to open up and promote increased trade, lower corporate-tax rates and used deregulation as an incentive for foreign investment. On the short term, the GDP grew while inflation and interest rates fell.

A laissez-faire Ireland became the go-to country for information technology industry giants, foreign investors, investment funds and a booming housing market that made it the envy of many other EU member states. Adopting the Friedman rule led to rapid growth in the 1990s and well into the first decade of the twenty-first century. Enter the global credit crisis and a burst property bubble.

The global economic downturn exposed cracks in the system and caused irreparable harm to the model that gave birth to the Celtic Tiger. The Debt-to-GDP ratio was immense, lifestyles were way too lavish, speculation was rampant and eventually the slowed global economy snapped the tiger’s back. Reckless low-interest borrowing from the European Central Bank (ECB) also left a huge bruise on Irish banks, such as Anglo Irish and Allied.

What were seen once as strengths quickly morphed to weaknesses, with crippling effects. There is now trouble on the Liffey as the coalition government is hanging by a thread.

Changing of the guard

Ireland’s punch-drunk government, led by Fianna Fáil, the senior partner in a ruling coalition with the Greens, is dazed from its troubled banking system and the severe cuts needed to slay the runaway public debt.

After months of unrealistic claims that it could weather the storm without assistance from the ECB or the IMF, Prime Minister Brian Cowen and Finance Minister Brian Lenihan came to terms with reality and agreed to an emergency bailout worth €85 billion ($110 billion). With this, they saw the last vestige of their credibility shattered and their dominance in parliament seriously challenged.

The recent by-election delivered yet more blows to Fianna Fáil, and could endanger the budget’s chances of being passed on 7 December. The party conceded defeat in the crucial Donegal South West by-election to Sinn Féin, the far left nationalist party.

With this, Mr. Cowen’s balance of power in the Dáil has shrunk to a razor-thin two seats, and it exposes popular support for socialist ideology during times of economic hardship. To make matters worse, his party’s poll ratings have been recently measured at 17 per cent, the lowest in its history. Although this is the second bailout in Europe, it may be the first time a government falls as a result of accepting it.

The tea leaves indicate a thumping in the next election. The Green Party, the junior partner in the ruling coalition, recently announced its decision to leave the government and called for a general election in the second half of January to provide “political certainty” in these uncertain times. However, if Fianna Fáil’s number of seats falls to one, it could force the government to dissolve.

Mr. Cowen’s leadership and his government’s days in power may be numbered as a result of intense political blowback and serious flak from the Irish people. Attempting to push through what is arguably the toughest budget in Ireland’s history will be an immense challenge.

A Machiavellian budget

Ireland’s besieged prime minister is set to present the annual budget next week, despite calls by the main opposition parties, Fine Gael and Labour, to hold an immediate election. Even so, an election before the budget is presented is unlikely because it would slow down bailout negotiations and put a strain on relations with the European Commission, the EU’s executive arm.

Mr. Cowen is pleading with the Dáil to support the tough measures being proposed to move ahead with the bailout. The budget will require a €6 billion ($7.8 billion) cut in the next year as part of an overall €15 billion ($19.5 billion) adjustment needed by 2014. These measures are highlighted in the EU-approved four-year recovery plan. The Greens have publicly stated that they would support the budget because it is a precondition for EU-IMF assistance in bailing out the troubled country. Prime Minister Cowen is also relying on his main rivals, Fine Gael, to support the budget, citing the national interest.

The passing of the budget is left in the hands of two independents backbenchers – Michael Lowry and Jackie Healy-Rae. Although reports indicate that the budget has a good chance of passing in order to pave the way for solvency through the bailout, it is far from certain if the independent MPs blow with the prevailing winds coming from Brussels, the EU’s power base and central nervous system.

The mood in Brussels

The hallways of the European Commission are almost certainly as filled with nervous tension and uncertainty as the halls of power in Dublin. Just months after Greece accepted a monumental €110 billion ($144 billion) rescue package, another club member is thrown a lifeline. Talk of contagion seems endless and the EU’s centre is seeking to calm worried investors.

Ireland’s bailout money comes from a €750 billion (about $1 trillion) emergency fund initiated by France and Germany following the Greek debt drama. The pièce de résistance is the European Financial Stability Facility, or EFSF, which currently has €440 billion ($572 billion) in credit guarantees for eurozone governments facing insolvency. Considered a “special service vehicle,” the facility is funded mainly by the European Commission, the ECB and the IMF. The latter basically provides a financial safety net. The ad-hoc creation officially expires in 2013, but some say it should be bigger and permanent.

Power brokers in Brussels are floating around the idea of setting up a new permanent mechanism to manage the sovereign-debt crisis in the EU, and potentially doubling the size of the EFSF. This has many European leaders and finance ministers sparring, putting German Chancellor Angela Merkel and French President Nicolas Sarkozy at the forefront. However, given the snail’s pace of negotiations to achieve the Lisbon Treaty, the EU’s pseudo-constitution, do not hold your breath waiting for a quick decision on a permanent bailout mechanism.

A few more canaries in the EU’s coal mine?

The Irish crisis is seismic, and the fear of contagion is the subject of many espresso-fuelled discussions at the Berlaymont and Place Luxembourg in Brussels. This bailout 2.0 shines an unwelcome light on the interdependence of the EU’s single-currency system. Investors are taking notice and they are feeling apprehensive.

Europe’s institutions are responding by flooding billions of euros into troubled nations, with interest, of course – in Ireland’s case, 5.8 per cent. The collective psyche of European authorities is that the European project – with a common currency as the focal point – is inherently resilient and built to withstand such pressures. Too much has been invested into the EU system for it to go down without a very determined fight.

Then again, the predominant style of capitalism feeds on investment and growth. Spooked investors are a reality and this will adversely affect fragile economies. Other EU hinterland nations, such as Portugal and Spain, are already feeling the heat. Last week Portugal approved an austerity budget that hopes to persuade EU authorities and investors that it doesn’t need to call-in a bailout. Spain is also center-stage because of its shrinking economy, weak growth forecast, high unemployment and irresponsible banks.

A report published in the New Journal of Physics on 25 November identified twelve countries with the greatest power to spread a financial crisis globally – Belgium and Luxembourg were on that list. The study’s impressive statistical approach and large data sets, collected by physicists from universities in Greece, Switzerland and Israel, reveal the vulnerability of the interconnected single currency system.

The debt crisis and bailout drama are not over – expect a few more acts in this very European tragedy.

Photos by Lauren Crothers, Natalie Guertin, Patrick Gauthier and Irena Tsoustas.