Irish politics could complicate EU bailout

November 22, 2010

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

LONDON — Ireland’s politics could complicate its bailout with potentially devastating consequences. Even though the ruling coalition has applied for financial aid, political turmoil means it may not survive long enough to negotiate a deal with the European Union and International Monetary Fund. With years of painful austerity on the way, the desire for a political fresh start is understandable. But any delay could further undermine confidence in the country’s fragile banks.

Ireland’s government is on life support. The Green party — the junior member in the ruling coalition — has promised to withdraw its support from the Fianna Fail party once the bailout is finalised. Meanwhile, two independent parliamentarians on whom the government relies for backing have indicated that they may not even support the crucial budget on Dec. 7. The government’s three-seat majority is likely to be reduced to two following a by-election later this week. So the administration may need the support of opposition parties to get the budget through.

Failure to pass this needed round of austerity measures would scupper the bailout — and throw Ireland into deep financial turmoil. In an effort to defuse the political crisis, Prime Minister Brian Cowen on Nov. 22 promised to call an election once the bailout is agreed. But even this may not be enough. Opposition parties could insist on an immediate election in return for sanctioning more cuts. If that were to happen, a new government would probably not be in place before January.

The economic realities facing Ireland mean that the bailout will be painful, regardless of which party is in power. Given the scale of the fiscal adjustment required, it makes sense for a government with a fresh mandate to make the difficult decisions. However, delay would spell danger. Though Ireland does not need to issue any new sovereign debt until next year, its banks are vulnerable to a loss of confidence. If depositors start to doubt that the bailout is definitely on its way, the crisis could quickly escalate. Then few politicians would escape the blame.

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