Kenny facing straight into a European storm over bailout

TAOISEACH-apparent Enda Kenny is facing the mammoth task of agreeing a new economic deal for the country with his future government partners, and then negotiating it with his soon-to-be fellow prime ministers in the EU, all within three weeks.

He could quickly find himself on a direct collision course with his new partners, threatening to veto what is being described as the Grand Bargain under negotiation and having to weigh up whether changes would require an Irish referendum.

If he finalises his programme for government with coalition partners Labour by Wednesday week when the Dáil meets, he will have less than two days before his first eurozone summit in Brussels on March 11.

His fellow EU leaders would prefer not to give him anything, with heavyweights like Germany and France believing the 5.8% interest rate being paid on the bailout to be fair, the need to cut the deficit by record amounts over the next four years to be essential and that the taxpayer should pay the bank debts to Europe’s banks.

On the one hand Kenny has promised to make the bank lenders take on some of the burden at least for the country’s €12 billion bank debt and reinstate the €1 taken off the minimum wage, while Labour has its own list of election promises to keep.

But Ireland’s demands are just a small part of the Grand Bargain being thrashed out in the EU, centring on changing the European Financial Stability Facility — known as the bailout fund — to make it more useful for saving the euro and more acceptable to German courts and citizens.

This has now become a mammoth project, with some wanting to make the fund as flexible as possible to allow countries to borrow to buy back their debt on the markets at a reduced rate for instance, or extend credit lines to those in temporary difficulties.

But Germany and some of the other Triple A countries whose credit rating ensures the fund can borrow cheaply from the markets are reluctant to allow too much flexibility.

Overarching it all, German Chancellor Angela Merkel needs to win the next regional election at the end of March, and she won’t unless she can show she is getting her pound of flesh.

This will be in the form of a competitiveness pact first put forward by France and Germany last month. A compromise version was sent to the 27 leaders by the Commission and EU president Herman Van Rompuy at the weekend.

It proposes targets to link wage increases to productivity, the retirement age to changes in pensions, and tax such as company tax to a band with a minimum rate set as currently happens with VAT, but which will not be as low as Ireland’s 12.5%.

These targets will be voluntary, but for sinners like Ireland and Greece they could be thinly disguised conditions. On the other hand, they need to agree a non-voluntary economic governance plan that will give a sizeable say over the national budget to Brussels.

So while Kenny will be trying to shave as much as possible off the interest rate on our €67bn loan, he will have to weigh it up against the possible cost to the country of conceding on corporation tax, for instance.

A well-placed EU source suggested that in the end Mr Kenny may be faced with the nuclear option of using the country’s veto and refusing to agree the package.