Opposition reaches pact to form Irish government

AP News
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Posted: Mar 06, 2011 3:49 PM
Opposition reaches pact to form Irish government

The two opposition parties that triumphed in Ireland's election, conservative Fine Gael and left-wing Labour, agreed Sunday to form the country's next coalition government after compromising on plans to repair the debt-battered economy.

Both parties ratified their 64-page plan following five days of negotiations. Fine Gael's lawmakers offered the document unanimous support, while Labour's much larger meeting of party activists also voted overwhelmingly in favor of the policy document.

The move clears the way for both parties' lawmakers to elect Fine Gael leader Enda Kenny prime minister when the new parliament convenes Wednesday. He will unveil his Cabinet then.

Kenny and Labour leader Eamon Gilmore stressed their government's immediate goal would be to improve relations with European Union partners _ so that they could re-negotiate terms of the humiliating international bailout accepted by the outgoing government of Prime Minister Brian Cowen.

"The new government will seek to re-negotiate the agreement which was reached with the European Union and the International Monetary Fund," Gilmore said. "There is work to be done in repairing this country's relations with its European partners."

Fine Gael won 76 seats and Labour 37 in the 166-member parliament in the Feb. 25 election. Both were record highs that reflected voter fury at the long-dominant Fianna Fail party, which was blamed for leading Ireland to the brink of bankruptcy.

In November, Ireland negotiated a potential euro67.5 billion ($94 billion) line of credit from EU and IMF donors designed to permit Ireland to keep paying its bills through 2014. The bailout became unavoidable as Ireland's largely state-owned banks found themselves unable to borrow on open markets and faced insolvency.

The Fine Gael-Labour government plan published Sunday does accept the need for massive austerity measures in coming years as part of the EU-IMF aid. But it stopped short of endorsing the previous government's commitment to slash euro15 billion ($21 billion) from Ireland's deficits by 2014. Ireland has already endured 2 1/2 years of heavy cuts and tax hikes to contain government red ink, but the government last year still spent more than euro50 billion and collected just 31 billion in tax.

The Fine Gael-Labour government plan says it won't reverse any of the euro6 billion ($8.37 billion) in 2011 cuts and tax hikes unveiled in December by the outgoing government. It also pledges to cut euro3 billion more from the 2012 deficit _ but says the remaining euro6 billion in deficit cuts pledged by the previous government might not happen.

The agreement does reaffirm that both parties accept the European Union's requirement that Ireland reduce its annual deficits to 3 percent of gross domestic product _ the upper limit for eurozone members _ by 2015. During the election campaign, Fine Gael had sought a tougher deadline of 2014, while Labour wanted the target to be postponed to 2016.

Sunday's document also commits the government to reverse a recent cut in Ireland's minimum wage, to hold a referendum on abolishing the upper house of parliament as a cost-saving measure, and to create a British-style system of national health insurance by 2016.

Despite coming from broadly different bases, Fine Gael and Labour have governed Ireland together in six governments since 1948. Their most recent coalition, in 1995-97, was the most harmonious one.

Fine Gael is pro-business and pro-EU with strong ties to the middle class and farmers. Labour defends union interests, largely represents urban, working-class voters, and can be far more critical of the EU, particularly on economic matters.

Kenny said he hoped to re-negotiate the average 5.8 percent interest rate on the EU-IMF loan package. That rate is far lower than what Ireland would pay on bond markets, but is still 3 percentage points higher than the lenders' own average costs.

German Chancellor Angela Merkel insists Ireland should benefit from a lower rate only if it agrees to tougher measures for getting its deficit under control.

Germany and fellow EU heavyweight France long have pressed Ireland to raise its 12.5 percent rate of tax on businesses, a policy that has wooed about 1,000 foreign multinationals to Ireland rather than the European continent.

Sunday's government document, however, reaffirmed that Ireland won't raise its business tax to European norms approaching 30 percent.

Kenny said Ireland is already burdened with 13.5 percent unemployment, the second-highest rate of unemployment in the eurozone behind Spain, and must do nothing to discourage employers from staying in Ireland.

Ireland was long the runaway growth leader in the eurozone, but the Celtic Tiger boom died in 2008 because of a property crash that followed 14 years of surging prices and risky speculation.

Ireland's banks over the previous decade borrowed hundreds of billions at exceptionally low rates of interest, thanks to Ireland's eurozone membership, and funneled most of it to Irish construction and property kingpins. Most of their property assets in the past year have been seized at knockdown prices by a new state-run "bad bank" charged with extracting toxic debts from five Irish banks exceeding euro70 billion ($100 billion).

Both Kenny and Gilmore campaigned on pledges to force foreign bondholders to bear more of the cost of Irish bank losses. The current government of Prime Minister Brian Cowen has been widely criticized for unveiling a 2008 state guarantee for all bank bondholders and still defends the policy, arguing that Ireland needed to retain confidence from foreign lenders.

The 2008 insurance policy was designed to prevent the banks' collapse by discouraging the rapid withdrawal of foreign loans and deposits. But Ireland ended up nationalizing most of the debt-crippled banks anyway, leaving taxpayers with a bill estimated at more than euro50 billion ($70 billion) _ equivalent to euro11,000 ($15,500) for every man, woman and child in Ireland.

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Online:

Program for government, http://bit.ly/fbH6DH

Fine Gael, http://www.finegael2011.com/index.asp

Labour, http://www.labour.ie/