Ireland aims to woo Europe with fiscal obedience

Reuters News
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Posted: Mar 22, 2011 10:30 AM

By Carmel Crimmins and Padraic Halpin

DUBLIN (Reuters) - Ireland's new government will stick to the budget targets laid down in an 85 billion euro ($119 billion) EU/IMF rescue package as it seeks to win European partners round to giving it easier terms on the loans.

Ireland's prime minister in-waiting Enda Kenny is under huge pressure to persuade Europe's paymaster Germany to cut the interest rate Brussels is charging and give Dublin more time to restructure its banks before a Europe-wide deal on the debt crisis is hammered out at summit on March 24-25.

The coalition agreement between Kenny's center-right Fine Gael party and the center-left Labour party, clinched shortly after midnight, seems designed to curry favor with the fiscally conservative Germans and draws a veil over some of the anti-EU rhetoric deployed in the election campaign.

"We have to repair broken bridges across our European partner to build up an understanding of our position," Brendan Howlin, one of the chief negotiators for the Labour party, told state broadcaster RTE.

"It is in everybody's interest, not only the national interest of Ireland, but in Europe's interest and in the interests of the maintenance of the euro that we have a path that is sustainable out of the economic hole that we find ourselves now in."

Fine Gael, which will lead the new government, has persuaded Labour to drop its demand that Ireland be given an extra year to get its budget deficit under control and is aiming for the bulk of the adjustment to be achieved through spending cuts.

The new government will aim to shrink the shortfall from nearly 12 percent of Gross Domestic Product (GDP) currently to below an EU limit of 3 percent by 2015, a deadline already okayed by Brussels last year amid concerns spluttering growth would prevent Dublin meeting an original target date of 2014.

There will be a new cabinet position to deal with public spending and public sector reform and the holder of this office, along with the finance minister and a minister from each of the two parties will sit on an newly-formed economic council.

"This is a new structure of cabinet ... economic policy will be determined by this council," said Howlin.

A source told Reuters that Fine Gael's finance spokesman, Michael Noonan, would be the administration's finance minister.

The source also said Labour's Pat Rabbitte would likely get the new ministerial post dealing with the public sector.

Analysts said investors would welcome Noonan's appointment given Fine Gael's pro-business, low-tax credentials and said the policy agreement was broadly expected.

"I wouldn't see anything there that would scare the markets, scare Europe, scare the IMF or change anything very substantially going forward," said Eoin Fahy, chief economist, Kleinwort Benson Investors.

"The fact that there will be a Fine Gael finance minister will be taken positively and should be because the ministry has a very large control over the small items, and not necessarily just the big picture macro stuff.

VERY SHORT HONEYMOON

Kenny, a former primary school teacher whose only previous government experience was as minister for tourism and trade in the 1990s, has less than 3 weeks to persuade European partners to relax the terms of their 40 billion euro plus worth of loans.

Kenny fears the deal will bankrupt the former "Celtic Tiger" economy but his pleas got a cool response from fellow European center-right leaders at a summit in Helsinki last week, where he was told that there would be "no free lunches."

A statement from the summit did point to a "periodical re-evaluation" of EU and international assistance holding out some hope for Ireland.

But there are fears in Dublin that any concession will require something in return with the country's low rate of corporation tax a likely battleground.

Kenny's coalition agreement with Labour party leader Eamon Gilmore does however strike the right notes for Europe.

There will be no new taxes on work and Dublin is targeting 2 billion euros from the sale of non-strategic state assets.

The two parties have compromised on job cuts in the public sector with some 25,000 positions set to be culled, roughly midway point between the 18,000 targeted by Labour and the 30,000 eyed by Fine Gael.

The fiscal deadline, the emphasis on cutbacks and the number of public sector jobs set for the chop all chime with the four-year austerity plan published by the outgoing government, and endorsed by the EU and the IMF, late last year.

The similarities with the policies of such an unpopular administration, which was roundly routed in the election for its handling of the economic crisis, were inevitable given the straitjacket imposed by the bailout but they will not prove popular with voters who were seeking change.

Labour party members, in particular, will be aggrieved that the leadership has given ground on job cuts.

"I suspect that when people see the reality of a programme for government that they will inevitably be disappointed," said Eoin O'Malley, a lecturer at Dublin City University.

"You can be almost guaranteed that there will be a very, very short honeymoon period for the new government."

The coalition deal will be formally approved by the two parties later on Sunday. The new government will meet for the first time on Wednesday when parliament is recalled.

($1=.7148 Euro)

(Editing by Jon Loades-Carter)