Analysis: Referendum puts Irish recovery story on hold

DUBLIN Wed Feb 29, 2012 11:33am EST

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DUBLIN (Reuters) - Ireland's gradual recovery from euro zone basket case to periphery pin-up faces a testing time after the government called a referendum on Europe's new fiscal treaty that will put austerity in the firing line.

Prime Minister Enda Kenny surprised parliament on Tuesday by announcing the vote, Ireland's fifth on Europe in 11 years. It will be first and possibly only plebiscite on a German-led plan for stricter budget discipline across the bloc.

With a tight vote likely in May or June, the turnaround that has seen Ireland perform best in class among Europe's bailout boys will be put on hold just as Dublin's paymasters boast that its progress shows their plan to fight the euro zone debt crisis will ultimately prevail.

The Irish rejected the two most recent European Union treaties before passing them in repeat referendums only after concessions were offered. Voter support for the EU has cooled as living standards have slumped due to austerity often depicted as imposed by Brussels.

But Dick Roche, a former European affairs minister who fought a decade of referendums and has been through highs and lows, said the government's task in convincing voters could be easier this time if it draws lessons from the past.

"I remember having some fairly lonely days when I was offered a handful of canvassers in parts of rural Ireland that I had never visited before... Everybody will have to pull out the stops this time," Roche told Reuters.

"It will be tough, there's no doubt about that but it's certainly winnable because you can explain, in black and white, what the consequences of a 'Yes' or a 'No' vote are," he said.

The ambiguities and impenetrability of the Lisbon Treaty doesn't arise on this occasion."

The government sleepwalked into a first vote on the EU's institutional reform treaty that was defeated by 53 percent of voters in 2008. Ministers were unprepared to counter opposition arguments that the text would affect Irish sovereignty on sensitive issues such as taxation, abortion and neutrality.

The fiscal compact vote will be much more straightforward and Kenny is framing it as one that will help Ireland's economic recovery and stability, the kind of argument that saw two-thirds of the electorate back the second Lisbon referendum in 2009.

Kenny may be best advised not to repeat predecessor Brian Cowen's decision to invite euro zone leaders to Dublin to help sway voters. French President Nicolas Sarkozy got a frosty reception last time after making comments perceived as a threat to the Irish if they voted the wrong way.

The welcome would be even less warm this time around.

NOTHING BUT BAD NEWS

The question may not be as abstract as the Lisbon and Nice Treaties on EU institutions that were initially defeated. But the campaign will put the government's unprecedented austerity drive - a series of spending cuts and tax hikes that has four more years to run - in sharp focus.

While Italy, Spain, Portugal and especially Greece have all experienced public anger over spending cuts, Ireland has implemented equally harsh measures without significant social unrest despite stubbornly high 14.2 percent unemployment.

However, pockets of protests on emotive issues like hospital closures and job cuts for teachers have increased in size and frequency, particularly in rural Ireland, and it's there that the main referendum battle lines will be drawn.

Opponents have dubbed the fiscal compact an "austerity treaty." Nationalist Sinn Fein, the only major party campaigning for a 'No' vote, has seen its popularity surge over its anti-austerity stance.

"If we say 'No' to this treaty, will we upset some of the powerful states in the EU? Yes we will. Is that a good or a bad thing? In our view it's a necessary thing because those states are trying to impose on us prescriptions that are bad," Sinn Fein's finance spokesman Pearse Doherty told Reuters.

"The new rules in this treaty and the very real and invasive enforcement mechanisms they include are going to level austerity on those people who are already bearing the brunt of decisions taken by politicians, bankers and developers."

Even if the government can secure a 'Yes' vote, the economy is likely to be in limbo until the last ballot is counted.

Ratification is essential to ensure Dublin has access to the European Stability Mechanism (ESM) if, as looks likely, it needs extra official funding when its current bailout ends.

Most analysts say Ireland's debt agency will have hold off on launching another bond switch after testing market sentiment with such a move last month. Plans to resume issuing short-term debt in early summer may also be under threat.

For the country's thriving multinational sector - companies like PayPal (EBAY.O), which added 1,000 jobs to its Irish base last week - doubts about the Irish story may also re-emerge.

"Nobody could say that this is anything but a bad news story. In no way is this welcome," said Eoin Fahy, Chief Economist with Kleinwort Benson Investments. "What we get is a period of uncertainty that will last at least until May and with no guarantee that it will be resolved even then."

"If you are sitting in some multinational in say the United States and considering whether to expand your operations in Ireland or establish a new facility, this would give you pause for thought."

(Additional reporting by Lorraine Turner and Conor Humphries; Editing by Paul Taylor)

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