STRASBOURG/DUBLIN (Reuters) - The European Union urged Ireland on Tuesday to adopt an austerity budget on time to unlock promised EU/IMF funding, in response to a deepening political crisis that could derail the financial rescue.
Dublin’s government is on a knife-edge. Damaged Prime Minister Brian Cowen has rebuffed calls for a snap election and insisted the budget would go ahead as planned on December 7 before he calls an early poll.
Opposition leader Enda Kenny hinted in parliament that his centre-right Fine Gael party might let the budget pass, saying it would act in the national interest, and challenged Cowen to bring it forward to next week, but the prime minister refused.
Cowen said he expected all budget legislation to be completed by February, suggesting he would not call an election in January as his coalition partners had requested.
European Monetary Affairs Commissioner Olli Rehn told reporters after meeting Irish members of the European Parliament in Strasbourg, France: ”Stability is important.
“We don’t have a position on the domestic democratic politics of Ireland but it is essential that the budget will be adopted in time and we will be able to conclude the negotiations on the EU-IMF programme in time.”
In New York, senior IMF official John Lipsky said talks with Ireland were moving forward quickly but it was up to the Irish government to make the necessary political decisions.
On Tuesday, the small leftist Sinn Fein party submitted a motion of no confidence in Cowen, but it is unlikely to be debated or put to a vote because the party lacks the required 12 signatories.
Cowen also faces critics in his own Fianna Fail party who want him out, though most want him to quit after the budget.
Trade unions have warned that the austerity plan could provoke civil unrest: a student demonstration over planned fee increases turned violent this month, and unions have organised a march to protest at the planned measures on Saturday in Dublin. Tens of thousands are expected to turn up.
Opposition politicians said they took Rehn’s comments seriously and were aware of the implications for the stability of the euro zone.
“We’re in an impossible situation here. We’re being asked to tacitly support a budget that we haven’t seen,” Fine Gael lawmaker Brian Hayes told public broadcaster RTE.
EU partners are watching the Irish turmoil with concern. German Chancellor Angela Merkel told employers that Ireland’s crisis was different from Greece’s but just as worrying and the euro was in an “exceptionally serious situation.”
Dutch Finance Minister Jan Kees de Jager said it would be a bad idea to throw Ireland out of the euro or split the single currency area with southern countries devaluing, since that would provoke ”a chain of unwanted events.
But he told RTL 7 television: “Shareholders and holders of subordinated bonds in Irish banks will have to bleed in a restructuring.”
Greece, the first country to be bailed out by the euro zone and the IMF earlier this year, won a vote of confidence from EU and IMF inspectors on Tuesday after promising extra measures to shore up its ailing finances.
Cowen has defied calls to quit, saying the national interest required that he press on to unveil a promised four-year austerity package on Wednesday.
A delay in adopting the budget would almost certainly prevent the release of the first bailout loans under IMF rules. A European Commission spokesman reminded Ireland that every day that passes was having an impact on its economy.
He also said it was hard to imagine Ireland remaining a low tax country, an apparent reference to Dublin’s ultra-low 12.5 percent corporation tax rate, an irritant to EU partners.
Both De Jager and French Economy Minister Christine Lagarde said Ireland would have to raise taxes as part of the deficit cutting package. The Dutchman said it would make more sense for Dublin to raise VAT than corporation tax.
Anger at Cowen’s handling of Ireland’s economic and banking crisis has ballooned since he announced the bailout, and his chances of passing the budget fell dramatically when two independent lawmakers said they were likely to withhold support.
Some voters questioned at random in Dublin said they had more faith in the IMF than in their own politicians. “At least the IMF might know what they’re doing,” said Margaret, 49, an office worker, who declined to give her family name.
“I would love to have thrown my book at the TV as Cowen was talking last night, but I couldn’t afford a new TV,” she added.
The Irish government is expected to announce it will cut the minimum wage, social welfare spending and the number of public employees and add a new property tax and higher income taxes in a package intended to shave 6 billion euros (5.1 billion pounds) off next year’s budget, and 15 billion off the annual budget by 2014.
The IMF said in a paper released on Monday that Ireland should gradually lower unemployment benefits and cut its minimum wage to boost employment.
EU partners and the IMF agreed in principle on Sunday to rescue Ireland with an expected 80 to 90 billion euros in loans to try to stop its crisis continuing to undermine the value of Ireland’s traded debt and that of countries with similar problems -- notably Portugal and Spain.
European financial markets slid on Tuesday, partly because of the mounting political uncertainty in Ireland and fears of contagion to other weak euro zone countries.
Irish shares were down as much as 3 percent, the cost of insuring Irish and Portuguese debt against default rose and the risk premium investors charge to hold Irish government bonds crept up further.
Central bank governor Patrick Honohan said all the country’s banks were up for sale and he expected the EU and the IMF to attach many conditions to a financial rescue.
Additional reporting by Padraic Halpin and Lorraine Turner in Dublin, Marcel Michelson in Amsterdam, Gernot Heller in Berlin, Leigh Thomas in Paris; Writing by Paul Taylor; editing by Tim Pearce