Opposition strikes deal to form Irish government

The two opposition parties that triumphed in Ireland's election, conservative Fine Gael and left-wing Labour, announced Sunday they have reached agreement to form the country's next coalition government following five days of negotiations.

The proposed pact still must be ratified at separate meetings of both parties later Sunday. But the leaders of Fine Gael and Labour, Enda Kenny and Eamon Gilmore, said they were confident this would happen, while some key issues - such as the share of Cabinet posts - would remain unsettled for a few more days.

Approval of the joint government platform - which includes goals on slashing Ireland's deficits in line with its international bailout - would permit Fine Gael and Labour lawmakers to elect Kenny prime minister when the new parliament convenes Wednesday.

Fine Gael won 76 seats and Labour 37 in the 166-member parliament in the Feb. 25 election. Both were record highs that reflected voter fury at the long-dominant Fianna Fail party, which was blamed for leading Ireland to the brink of bankruptcy.

In November, Ireland was forced by European Union partners to negotiate a potential euro67.5 billion ($94 billion) line of credit from EU and International Monetary Fund donors. The bailout became unavoidable as Ireland's largely state-owned banks found themselves unable to borrow on open markets and faced insolvency.

Fine Gael and Labour both campaigned on platforms lambasting the bailout and threatening to renegotiate its terms. But both are already backtracking publicly now that the votes have been counted and they face responsibility for corking Ireland's financial black hole.

Officials in both parties said Sunday the new government would try to stick to the EU-IMF goal of slashing euro15 billion ($21 billion) from Ireland's deficits in the coming four years and reduce the 2015 deficit to 3 percent of gross domestic product, the eurozone limit. The two parties remain divided, however, on the smartest way to do this.

Fine Gael favors billions more in spending cuts on top of those already imposed since 2008, while Labour - seeking to protect welfare benefits and state jobs - wants more taxes particularly on higher earners.

Analysts say the new government will have no choice but to do both, since Ireland's deficit in 2010 was a modern European record of 32 percent of GDP including exceptional bank-bailout costs.

Even excluding those, Ireland last year spent more than euro50 billion but collected just euro31 billion in taxes, a gap that Fianna Fail had already committed to narrow this year with euro6 billion in cuts and tax hikes announced in December. The new Fine Gael-Labour government would be responsible for deciding on the remaining euro9 billion in deficit cuts sought by EU-IMF donors.

Despite coming from broadly different bases, Fine Gael and Labour have governed Ireland together in six governments since 1948. Their most recent coalition, in 1995-97, was the most harmonious one.

Fine Gael is pro-business and pro-EU with strong ties to the middle class and rural farmers. Labour defends union interests, largely represents urban, working-class voters, and can be far more critical of the EU, particularly on economic matters.

Kenny has pledged to renegotiate parts of the EU-IMF loan deal, particularly its average interest rate of 5.8 percent. That rate is far lower than what Ireland would pay on bond markets, but is still 3 percentage points higher than the lenders' own average costs.

German Chancellor Angela Merkel insists Ireland should benefit from a lower rate only if it agrees to tougher measures for getting its deficit under control.

Germany and fellow EU heavyweight France long have pressed Ireland to raise its 12.5 percent rate of tax on businesses, a policy that has wooed about 1,000 foreign multinationals to Ireland rather than the European continent.

Kenny insists that Ireland won't raise its business tax to European norms approaching 30 percent. He says Ireland is already burdened with 13.5 percent unemployment, the second-highest rate of unemployment in the eurozone behind Spain, and must do nothing to discourage employers from staying in Ireland.

Ireland was long the runaway growth leader in the eurozone, but the Celtic Tiger boom died in 2008 because of a property crash that followed 14 years of surging prices and risky speculation.

Ireland's banks over the previous decade borrowed hundreds of billions at exceptionally low rates of interest, thanks to Ireland's eurozone membership, and funneled most of it to Irish construction and property kingpins. Most of their property assets in the past year have been seized at knockdown prices by a new state-run "bad bank" charged with extracting toxic debts from five Irish banks exceeding euro70 billion ($100 billion).

Both Kenny and Gilmore campaigned on pledges to force foreign bondholders to bear more of the cost of Irish bank losses. The current government of Prime Minister Brian Cowen has been widely criticized for unveiling a 2008 state guarantee for all bank bondholders and still defends the policy, arguing that Ireland needed to retain confidence from foreign lenders.

The 2008 insurance policy was designed to prevent the banks' collapse by discouraging the rapid withdrawal of foreign loans and deposits. But Ireland ended up nationalizing most of the debt-crippled banks anyway, leaving taxpayers with a bill estimated at more than euro50 billion ($70 billion) - equivalent to euro11,000 ($15,500) for every man, woman and child in Ireland.