The fragile Irish government’s slim majority came under intense pressure in a by-election yesterday as talks on an international bailout for the country’s shattered economy gathered pace.
Prime Minister Brian Cowen’s Fianna Fail party was widely expected to lose its seat in County Donegal in northwest Ireland to the nationalist Sinn Fein party, cutting the coalition government’s majority to just two seats.
The day after Ireland published a four-year package of austerity measures designed to smooth the way towards huge loans from the EU and IMF, Mr Cowen warned that everyone would have to tighten their belts if Ireland was to recover.
Mr Cowen told Parliament the plan unprecedented in Irish history gave people a chance to see the sharp “adjustment” necessary to shore up the national finances and “plan ahead for the future”.
“People in their own household experience know that you can’t go on with a situation if your revenues are back to what you were earning in 2003 and that your spend is right up to date in 2010 terms.
“People know that is not a sustainable position,” he said.
Having built up a deficit equivalent to 32 per cent of gross domestic product this year, Ireland is in negotiations to borrow about €85 billion from the European Union and the International Monetary Fund.
The talks on the bailout are set to wrap up on Sunday, diplomatic sources in Brussels said.
The international intervention to help Ireland has failed to remove doubts about its ability to stabilise its shattered finances.
That concern, and fears of contagion spreading to Portugal and the far larger Spanish economy, continued to hurt the euro, which was only slightly up at $1.3370.
In more bad news for Dublin, the yield on benchmark 10-year government bonds jumped to record highs above nine per cent as markets remained nervous.
The draconian austerity plan and a budget on December 7 are crucial steps to show Ireland’s fellow eurozone members that it is putting its finances in order. Ireland has however managed to preserve its ultra-low 12.5 per cent corporation tax rate, a key reason that foreign companies have invested there.
The government’s decision to turn to the EU and IMF has enraged Mr Cowen’s opponents, who accused him of humiliating the country.
Meanwhile, German Chancellor Angela Merkel and French President Nicholas Sarkozy yesterday urged quick action on an agreement providing Ireland with a financial bailout from the EU and IMF.
The two leaders spoke by telephone yesterday.