Sunday, February 27, 2011

Analysis: Ireland's new govt has little time to prove itself


Enda Kenny has a month to show he can be a success as Ireland's prime minister.

The former primary school teacher's center-right Fine Gael party cruised to victory in a weekend parliamentary election dominated by anger at the country's economic meltdown and the harsh cure prescribed by European partners.

A Fine Gael-led government, probably in coalition with the center-left Labour Party, has no time to savor its triumph or settle into power after nearly two decades in opposition.

Starting next week, the parties' pledges to renegotiate the terms of an 85-billion-euro bailout by the European Union and the International Monetary Fund will be put to the test when Kenny goes to Helsinki on Friday for a summit of EU leaders who belong to the European People's Party, the European Parliament's center-right bloc.

He has only four weeks to persuade Europe's paymaster Germany to ease the tough terms attached to the EU's 40-billion-euros-plus in loans before a comprehensive package to resolve Europe's debt crisis is agreed at a summit on March 24 and 25.

"Both Labour and Fine Gael are adamant that they're not going to counter any talk of default, so they'll have to try and convince Europe that they need to get something out of these talks," said Eoin O'Malley, lecturer at Dublin City University.

Ireland's new leaders believe the bailout will bankrupt an economy still in the doldrums, a view shared by many investors who continue to steer clear of Irish debt.

Kenny expects Germany to agree to reduce the average rate of 5.8 percent charged on the EU loans but, while that could be sold as a victory to people back home, it will not make much difference to a debt mountain of about 155 billion euros.

Goodbody Stockbrokers estimated a hefty one percentage point cut would save 675 million euros a year, representing just 5 percent of the annual social welfare bill.

In return for relaxing terms, Europe will want something from Dublin, setting the stage for a battle royal over its low rate of corporation tax, viewed as anti-competitive in higher-tax European countries.

"We are in a moment of maximum danger on that," said Hugo Brady, senior research fellow at the Center for European Reform.

"We are hamstrung in the language of Brussels because we are askers and in the logic of Brussels askers have to give something."

NIGHTMARE SCENARIO

It is not in Europe's interests to let Ireland hang out to dry.

An Irish sovereign default would destabilize the entire currency zone and send a signal to other peripheral countries that the sort of harsh austerity measures implemented by Dublin are pointless, undermining the message the fiscally conservative Germans have been hammering home.

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