Victorious Irish party to start talks on new government

DUBLIN Sun Feb 27, 2011 6:26pm EST

1 of 8. Fine Gael leader Enda Kenny addresses supporters in Dublin, February 26, 2011.

Credit: Reuters/Darren Staples

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DUBLIN (Reuters) - Ireland's largest opposition party said it would start urgent talks on forming a new government on Monday in a bid to turn its landslide election win into a mandate to renegotiate a bailout deal with Europe.

Fine Gael, which cast the ruling Fianna Fail party into the political wilderness in Friday's poll, has vowed to move quickly to extract the former "Celtic Tiger" economy from the industrialized world's deepest recession.

Party leader Enda Kenny has just four weeks to persuade Europe's paymaster Germany to ease tough terms attached to an 85-billion-euro EU/IMF bailout before a package to resolve Europe's debt crisis is agreed at a summit on March 24 and 25.

Center-right Fine Gael swept into power on a wave of voter anger over the country's financial meltdown and a pledge to renegotiate the EU/IMF deal. It is on course for a record 75-plus seats but will fall short of a majority.

Party officials have indicated a preference for a coalition with the center-left Labor party. A spokesman said it would wait until final results on Monday before starting any talks.

A partnership with Labor, expected to get over 35 seats, would create a majority of around 110 of 166 seats, creating a strong mandate for tough talks with EU partners.

Depending on its final tally, Fine Gael could instead seek the support of independent lawmakers, but senior party figures have warned such a minority government would be too unstable.

EU BAILOUT TALKS

Kenny, a former teacher, heads to Helsinki on Friday for a summit of EU leaders including German Chancellor Angela Merkel. Party sources say he will want a firm indication of the make-up of a new government by then.

Kenny spoke to Merkel and European Commission President Jose Manuel Barroso "in broad terms" about the IMF/EU bailout during phone calls on Sunday, Fine Gael said in a statement.

In return for relaxing terms, Europe will want something from Dublin, setting the stage for a battle over its low rate of corporation tax, viewed as anti-competitive by many EU states.

Despite clashing in the election campaign, Fine Gael and Labor have a history of working well together and a record majority should bring some stability back to Irish politics after the chaos of Fianna Fail's last days in office.

The biggest fault-line is over the deadline to cut the fiscal deficit from 12 percent of GDP to the EU limit of 3.

Fine Gael has committed to hitting that target by 2014, as agreed under the EU/IMF bailout, with a greater emphasis on spending cuts but Labor wants to stretch that out to 2016 with a more even split between tax hikes and cutbacks.

There are big differences over public sector redundancies and differing plans for healthcare reform but neither are seen as insurmountable. The parties do agree on some key policy areas, including maintaining the low rate of corporation tax and the possibility of privatizing state assets.

( Editing by Elizabeth Fullerton)

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