The situation in Athens carries a new threat to efforts at fixing Ireland’s addled economy

THE GREEK bailout drama intensifies by the day. Faced with a new wave of angry street protests, Greek prime minister George Papandreou is battling to convince sceptics in his government to accept a severe new dose of austerity. What does this mean for Ireland?

It is a given that the chaotic political situation in Athens carries a grave new threat to the titanic effort to fix Ireland’s addled economy. After all, one of the great lessons of the debt debacle is that pressure on one euro zone weakling amplifies pressure on all.

Dublin is still angling for a return to private debt markets next year, a huge challenge in its own right. The unpredictable events in Greece, over which Taoiseach Enda Kenny has no control, will make that considerably more difficult.

This increases the likelihood that the Government will come under pressure from its international sponsors to tackle courageously the issues that lie within its own power.

The bailout “troika” – comprising the EU Commission, the European Central Bank and the International Monetary Fund – issued a positive report to Kenny at the end of its first formal review of Ireland’s bailout in mid-April.

With a new troika mission due back in Dublin early next month, fresh scrutiny is imminent. This will be a key test.

The Government’s honeymoon is over, prickly decisions loom on labour market reforms and a difficult budget estimates campaign is not far away. As Papandreou struggles to retain control over his administration, a mantra heard last year as Greece went down in flames is again to be heard.

Back then, Athens was told to follow Dublin down the path of austerity. The troika wants Greece again to follow Ireland’s example – and that of Portugal – by forging a national political consensus on the cuts. No doubt this heralds a certain confidence in Ireland’s effort to bring its wayward public finances and burnt-out banks under control. Indeed, the positive message was reiterated this week when the commission said in a report that Dublin’s implementation of the bailout programme was on track.

But how do Ireland’s international lenders really gauge the present situation?

To what extent does the volatile scene in Greece change things?

Should the Government be doing more – or less – to reinforce the effort?

While it would be wrong to say the perception is overwhelmingly positive, Ireland’s sponsors are satisfied, in the main, that the Government is doing its job. They also believe the rescue plan can restore the economy to health. There is concern, however, on two fronts.

Some involved in the rescue are unhappy with public declarations by senior Ministers about the possibility of a second Irish bailout or that the Government wants longer loan maturities on some of its debt.

It is also believed that they want the Government to row in firmly behind Minister for Enterprise Richard Bruton in his push for employment reforms, which is toxic on the Labour flank of the Coalition.

Taking questions from reporters in Frankfurt yesterday, ECB chief Jean Claude Trichet called for “verbal discipline” throughout the euro zone and said anything that encouraged flexibility and structural reforms in labour markets was good.

If Minister for Transport Leo Varadkar antagonised some of his Cabinet colleagues by speculating about the threat of a second EU-IMF intervention, Ireland’s sponsors were not impressed at all. The same goes for suggestions from Minister for Public Expenditure Brendan Howlin that the Government hopes to reschedule the EU-IMF portion of its debt.

Such talk is held to be dangerous and open to misinterpretation as investors are in uproar over the perceived threat of debt restructuring – a form of default – in Greece.

In the view of people involved in the Irish rescue, anything which suggests the Government favours any debt relief or does not believe in its economic plan is a very bad thing.

Not only are the markets on high alert, they say, but so too are the euro zone countries that are advancing loans to the Irish bailout.

In their eyes, anything suggesting the Government might waver on its international commitments or take steps to diminish them is unhelpful. The team in which all players pursue the same goal is seen to have a better chance of winning.

It is pointed out here that persistent talk of Greek debt restructuring served in recent weeks to aggravate the turmoil in that country and in the wider euro zone. Thus the spike in Greece’s notional borrowing costs hit Irish bond yields, which remain at penal rates. This means private investors are still loath to trust Dublin with their money.

Similarly, Ireland’s rescuers believe the recovery effort would be boosted significantly if Bruton was able to pursue a radical reform of labour market contracts and entitlements for premium pay for Sunday and other duties.

In their view, it is crucial to provide fresh scope for “downward wage flexibility” in the construction and electrical contracting sectors, which raises the controversial prospect of pay cuts in sectors already badly hit by recession.

Certain Labour TDs are already up in arms about that – and Minister for Communications Pat Rabbitte says it would be wrong to assume the salvation of the Irish economy lies in cutting the wages of the lowest paid.

However, Ireland’s sponsors are believed to argue that the measures proposed by Bruton would protect existing jobs and facilitate the creation of new ones. They see this as an important element in the effort to stabilise the public finances, as every job lost adds to the burden on the State and lessens already-weak tax revenue. Jobs created have the opposite effect.

It is a given that this question is highly charged politically for Kenny, and that no worker welcomes a pay cut. Yet those who promote the notion say it would be better to allow Bruton move ahead quickly with his reforms. Speed is essential, they add, as the benefit might not be seen for a couple of years.

They also argue that the Government has a particularly strong mandate and that voters would not thank it in future for watering down difficult initiatives if the recovery effort fell flat. Moreover, they say, markets lenders would take such an initiative as a positive signal of good intent.

If Greece shows what happens when a bailout goes wrong, Kenny will have to show the troika within weeks that he is still doing the business. His Government has focused for months on the bailout interest rate, without much success. New pressures are on the horizon.