Europe austerity debate to test periphery political will

DUBLIN, April 28 Sun Apr 28, 2013 3:30am EDT

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DUBLIN, April 28 (Reuters) - Readers of Ireland's largest-selling daily newspaper were confronted by an unexpected front page headline this week when the Irish Independent proclaimed the 'End Of Austerity'.

In a country that began cutting spending and hiking taxes almost five years ago, well before the scale of the euro zone's debt crisis was evident, weary Irish voters have more interest than most in the fresh debate over Europe's cornerstone policy.

But as European Commission President Jose Manuel Barroso put the austerity question back on the agenda by suggesting it had reached its natural limit of popular support, data showed that in Europe, only Greece has a higher underlying budget deficit.

While better than was assumed under its EU/IMF bailout, Ireland's deficit of 7.6 percent of annual output nevertheless points to more tough budgets and soul searching in Brussels may simply make it harder for politicians to push cuts through.

"It's a dangerous game," said Donal Sheridan, a university lecturer, after reading the Independent's eye-catching headline at a newsstand on Dublin's main thoroughfare, O'Connell Street.

"If you're going to do something significant, fair enough, give people the indication so they can look forward to it. But if you're not, you're just building up expectations and people will be even more disappointed when the budget comes."

Barroso's comments, echoed by the IMF but resisted by the European Central Bank, come at a tricky time for the Irish government as it tries to revive a failed plan to cut public pay while keeping the kind of industrial peace that has marked it apart from other euro zone strugglers.

The deal, aimed at saving 1 billion euros between now and 2015, was rejected by public servants last week and trade union leaders have been emboldened by the increasing calls to throttle back on debt-cutting drives.

The government's usual reaction -- blaming the demands of its international lenders, the European Commission, the International Monetary Fund the European Central Bank -- has suddenly become less convincing.

"EUROPE RUNNING HEADLESS"

It is not just in Dublin that political will is set to be tested in the coming months. In Madrid, Prime Minister Mariano Rajoy laid out a package of reforms on Friday that he hopes will win him some breathing space from Europe.

Yet to trim a deficit almost as large as Ireland's, he must make temporary tax hikes and wage cuts permanent, finish a long-overdue reform of the public pension system and oversee a total overhaul of public administration.

Each will be a tough political ask on their own when more than one in four Spaniards are unable to find work.

In Portugal too, wider calls for a row back on austerity come with Lisbon under more pressure than at any point in its two-year bailout to rush through spending cuts and cut a deficit that rose sharply to 6.4 percent of GDP last year.

Just last week, the government approved new cuts to put the budget agreed with the European Union and International Monetary Fund back on track after the country's constitutional court rejected parts of this year's plan.

Unsurprisingly, Portuguese media have taken the change in EU rhetoric, as well as recent pro-growth proposals introduced by the government, with a pinch of salt.

"The worst thing about Barroso's statements is that it is not the first time that he says one thing today and another thing tomorrow," political commentator Camilo Lourenco wrote in business newspaper Jornal de Negocios on Tuesday in an opinion piece titled 'Barroso and Europe Running Headless'

While Spain, like Portugal, is expected be given longer to meet its deficit-cutting goals and Ireland is already talking about investing the money left over from beating its targets, this will likely be the limit of any change of tack.

"There is a risk that the tone of the current conversation suggests austerity is an option when in reality there is further adjustment to come," said Austin Hughes, economist at KBC Bank and author of Ireland's monthly consumer price index commentary.

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