Analysis - Austerity pressure grows on Irish coalition

DUBLIN Thu Sep 15, 2011 5:42pm BST

Ireland's Prime Minister Enda Kenny speaks during a news conference at the European Council building at the end of an Euro zone leaders crisis summit in Brussels, July 21, 2011. REUTERS/Eric Vidal

Ireland's Prime Minister Enda Kenny speaks during a news conference at the European Council building at the end of an Euro zone leaders crisis summit in Brussels, July 21, 2011.

Credit: Reuters/Eric Vidal

DUBLIN (Reuters) - International calls on Ireland to ramp up austerity and privatisation plans are damaging the ruling party's centre-left coalition partner, which was elected on a pledge to protect working people from Europe's fiscal hawks.

The International Monetary Fund last week urged Ireland to more than double the scope of its privatisation while a senior official from the Frankfurt-based European Central Bank called on the government to cut the wages of the heavily unionised state sector.

Anxious to distinguish itself from Greece by meeting all the terms of its 85 billion euros EU-IMF bailout, Prime Minister Enda Kenny's coalition is expected to draft a list of asset sales and pass its first -- and likely harshest -- budget this December.

But the measures, so unwelcome to many people, seem certain to raise tensions between Kenny's centre-right Fine Gael party and left-leaning Labour, setting the tone for their term of office, which is set to run until 2016.

"The honeymoon has gone on far longer than people had anticipated... but they haven't yet had to take the really tough decisions," said David Farrell, professor of politics at University College Dublin.

"This budget is going to be an extremely hard one. The big unknown yet is how many back-benchers peel off when the really big decisions come to the fore," he said.

The Labour party, which came to power on a pledge to replace "Frankfurt's way" with "Labour's way," faces a trying autumn as it seeks to fulfil Ireland's obligation to its international lenders while keeping its grassroots supporters on side.

Ireland's government has a record 28-seat majority and has proven very stable so far, but a weakened Labour would limit the coalition's ability to push through unpopular cutbacks.

The opposition benches have a large number of left-wing deputies, from the Sinn Fein party to Independent deputies, who will rebuke Labour for abandoning its principles.

Labour's support has plunged to 12 percent at the last major opinion poll from a 19 percent in the February election, when it achieved a record 37 seats.

Fine Gael, whose campaign included a call for privatisations and faster austerity measures, has seen its support climb since its electoral victory.

"Labour is certainly under much more pressure than Fine Gael," said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin. "It's difficult to see how you would get the savings if you don't look at social welfare and (state workers') pay. There could be some tensions there."

PRIVATISATION TENSIONS

Most controversial is the privatisation drive, an agenda that is anathema to Labour's left-leaning base and one that will have to be handled delicately after a previous disastrous privatisation left many middle class people out of pocket.

Shares in telecoms monopoly eircom collapsed after an IPO marketed as a one-way bet to the Irish public. A series of changes of ownership left it with a 3.8 billion euro (3.3 billion pound) debt pile at the end of last year.

"Politically this is extremely sensitive," said Eoin Reeves, a University of Limerick economist. "It won't split the government, but it will certainly raise tensions."

Labour is particularly exposed as it controls the energy ministry, the likely focus of the privatisations.

On Wednesday, Energy Minister Pat Rabbitte told parliament that he was reluctantly announcing the sale of a minority stake in the Electricity Supply Board.

"I find myself in a position I do not want to be in but I acknowledge that the survival and viability of this economy is at risk," Rabbitte said. The announcement drew a stream of criticism from rival left-leaning parties. Employees of the firm threatened to strike if a sale goes ahead.

Labour has agreed to 2 billion euros worth of privatisations under pressure from Fine Gael. But the stakes were raised last week when the IMF said Ireland should aim for a 5 billion euro sell-off, as set out in a government-sponsored report.

Some commentators have placed the blame on Labour's slide in the polls on a weak performance by leader Eamon Gilmore, who was the most popular leader in the country in the run-up to the election, but has been eclipsed by Kenny.

Kenny's ratings were boosted in July by his attack on the Vatican in the wake of a series of clerical abuse scandals, stealing a charge on traditionally secular Labour.

It may get some relief in October's election for Ireland's ceremonial presidency, in which Labour's candidate is well ahead of his Fine Gael rival.

But that will likely be quickly forgotten when the coalition releases its first budget in December.

The budget is to be the largest of four austerity plans, with the government planning 1.5 billion euros of new and higher taxes and 2.1 billion in cutbacks. While the population has grown used to budget pain, the government faces a series of uncomfortable choices.

"If they are trimming fat off the state, there won't be huge political ramifications, in fact they might get credit for that," said Hugo Brady, senior research fellow at the Centre for European Reform.

"But if they cut what is seen as the family silver, or fire sale state assets for less than they are worth, this will make Labour's position more difficult."

Whatever the coalition does, its future will likely depend on whether Europe's leaders can get to grips with the deepening euro zone debt crisis.

"If there is a flurry of defaults, all bets are off," said Brady.

(Editing by Mark Heinrich)

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