Nieuwe Ierse regering bereidt zich voor op EU-top (en)
EUOBSERVER / BRUSSELS - The two largest parties to emerge from last week's snap Irish general election, centre-right Fine Gael and Labour, have agreed on a programme for government. The coalition pact comes days ahead of a pair of European summits where Dublin is hoping to win better terms on the €85 billion bail-out the EU i and IMF i agreed with the defeated Fianna Fail administration.
The two parties ahead of the election had both committed themselves to sticking to Brussels-imposed austerity, but differed on how to impose the cuts, the balance of spending reduction versus tax increases, and the timescale involved.
Taking almost a week to hammer out an agreement, the pair have now backed the outgoing government's budget deficit target of three percent of GDP by 2015. This means the €6 billion in cuts in 2011 are still to go ahead, along with the further €3 billion in cuts next year.
However, public sector job cuts will be delivered via 25,000 voluntary redundancies by 2014, including 18-21,000 from 2011-2012, instead of the 30,000 immediate job losses proposed by Fine Gael.
The cut in the minimum wage will also be reversed.
Under the agreement, economic decisions will now be made by a quartet of ministers, with the governing parties getting two ministers a piece.
The finance ministry will also be divided, with banking policy and budget making falling within the finance minister's portfolio, and public spending decisions carved off and placed within a yet-to-be-established public expenditure ministry.
Where the pair agreed going into the election was in a focus on efforts to renegotiate the EU-IMF rescue, a move the new government will press for at an upcoming summit of eurozone i leaders on 11 March and a second EU summit of the bloc's full 27 member states at the end of the month.
Dublin is looking to either reduce the six percent interest rate paid on the €85 billion loan or extend the payment period, or some combination of the two options.
Economy and monetary affairs commissioner Olli Rehn has backed the Irish position on easing the lending terms, saying that the credit conditions may be affecting the country's ability to return to growth and market financing.
"I see a danger that we might overburden both countries with overly strict credit conditions," Mr. Rehn told the Handelsblatt, a German daily, on Monday, saying that he favoured a loan extension to seven years from the current three and a half and that a debate be had on the interest rate.
His spokesman, Amadeu Altafaj, last week said that similar relief should be offered to Greece on its €110 billion bail-out as member states should not be treated differently.
"The pricing of the aid is open. Any way we can reinforce Ireland's fiscal sustainability makes sense. This goes for Greece as well, taking into account equal treatment for all member states," he told EUobserver.
The key is to such relief would be a lowering of the punitive three percent surcharge the EU imposed atop the rate at which international lenders themselves borrow in order to deliver the cash to Ireland.
The surcharge, which delivers a hefty profit to the guarantors of the lending, was imposed to dissuade other countries from making similar bail-out claims.
However, while the commission backs a reduction, Germany is likely to demand some stringent quid pro quo in return, perhaps still more austerity or a raising of the country's low 12.5 percent corporate tax rate. Meanwhile some states, notably the Netherlands, are firmly opposed to any relief at all.
There is still more resistance from the core of Eurozone states and Brussels over the second main plank of the Fine-Gael-Labour programme, efforts to force senior bondholders to take a haircut - accept some losses - on debt issued before the government issued a guarantee in September 2008 to prevent a run on the banks.
Mr Rehn has ruled out such a move and Germany and the European Central Bank has also said this must be off the table.
The question on both points - an interest rate cut and imposing haircuts on senior debt - is whether the new government is willing to play hardball or softball with Brussels, Berlin and Frankfurt.
Commentators have suggested that Dublin is in in a fairly weak negotiating position, dependent as it is on international lending to keep government services ticking over and pay salaries.
But the UK and the Netherlands were forced to accept a reduction in the rate they charged Iceland over the reimbursement of Icesave depositors, after the Icelandic people rejected in a referendum the punitive rate charged.
Dublin can point to this example, as it can to moves by Denmark to impose haircuts on senior debt holders at Amagerbanken in relation to the desire to make bankers pay their part toward the recovery.
And the new government might also point out that a majority had either voted for a renegotiation of the deal or its outright rejection, in the case of left-wing voters plumping for Sinn Fein and the United Left Alliance, although Brussels has repeatedly stated that the deal is with the entire Irish state and not merely the outgoing administration.
But the biggest trump card in Dublin's hand is that core eurozone banks, with their own distressed balance sheets, need Ireland to keep paying them as much as Ireland needs the EU and IMF to keep lending. Any threat from Dublin even to delay repayments would send shivers through the markets.
However, the new Taoiseach, Fine Gael's Enda Kenny, already seemed to indicate at a meeting of Europe's centre-right leaders in Helsinki over the weekend that he had given up the fight.
The centre-right leaders welcomed their newest member but were lukewarm towards his call for an immediate reduction in the interest rate charged on the Ireland's recent international loan.
"We encourage a periodical re-evaluation of EU and international assistance, which may lead to possible amendments of the packages in place," said the meeting's final conclusions.
Mr Kenny at which point came very close to saying Ireland's chances of getting an immediate reduction were over.