Irish Resistance Weighs on Euro

The slide in the EURUSD trade continues as the Irish government faces ongoing opposition to its proposed austerity budget. Under terms of Ireland’s agreement with the European Central Bank and the IMF, the first payment of the €85 billion bailout will be issued only after the budget is adopted.

The Wall Street Journal cites a report from Reuters that the Irish Labor Party plans to vote against the budget. By itself, the Labor Party’s opposition won’t kill the budget, but the ruling Fianna Fáil-Green coalition has a bare two-seat majority in the Irish parliament.

The agreement between Ireland and the ECB-IMF calls for the country to reduce its deficit from 32% of GDP to 3% in just four years. The austerity budget is a €6 billion first step in achieving total adjustment of €15 billion.

The austerity budget is expected to be approved, if grudgingly, but a change in government is sure to follow. As part of a deal to get a vote on the budget, the prime minister was forced to agree to hold new elections immediately after the budget work is finished. The current ruling party is likely to be voted out, and possibly replaced by a Fine Gael-Labor coalition.

Ireland’s parliament is scheduled to vote on the budget on December 15th. In the meantime, various parts of the austerity package are being considered separately and it seems fair to say that the Irish public is not happy about the cuts that have to be made and the new taxes that have to be levied to meet the ECB-IMF demands.

Even following approval of the budget, installing a new government might cause more forex jitters as markets wait to find out if the new rulers will try to unwind some of the austerity measures.

The fears about Ireland have added to fears that other euro-zone countries, especially Portugal and Spain, could also reach a crisis point. The combined worries keep putting pressure on the euro. More pressure still comes as a result of the US tax agreement between President Obama and Republican Party leaders. The deal seems to have been adding strength to the dollar, but that could reverse if Democrats reject the deal or demand important changes to it.

For now, the euro looks to be the loser. By this time next week though, the wind could very well have shifted.