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ECB's Stark tells Ireland to ramp up austerity

Ireland's government should cut public sector pay again to get its budget deficit under control, the ECB's departing chief economist Juergen Stark said in an interview published on Monday.

Mr. Stark's comments, made hours before his shock resignation on Friday, heap pressure on Prime Minister Enda Kenny to go beyond the €3.6-billion ($4.9-billion U.S.) in austerity measures planned for next year and put his government's pledge to protect public sector wages under scrutiny.

"The government should be even more ambitious in cutting the public deficit ratio, which is still at double-digit level," Mr. Stark was quoted as saying in the Irish Times interview.

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"From a political point of view -- on which in principle I have no comment -- one needs to consider that other countries of the euro area provide financial support to Ireland, (countries) in which the wages of the civil service are significantly lower.

"This needs to be corrected."

Mr. Stark, the top German at the European Central Bank, resigned in a conflict over its bond-buying program but remains on its board until a successor is appointed.

Analysts said his comments reflected a view in Frankfurt that Ireland needed to do more to ensure its €85-billion bailout is a success.

The ECB is part of the Troika of official creditors, including the International Monetary Fund and the European Commission, which monitors Dublin's bailout progress. The ECB has lent banks in Ireland nearly 100 billion euros in emergency liquidity.

"While Stark is recognized as the most hawkish member of the governing council, some of the views are governing council views," said Dermot O'Leary, chief economist at Goodbody Stockbrokers. "We have to be cognizant of what the ECB says because we have so much liquidity outstanding from them."

Ireland's Finance Minister Michael Noonan, a member of the senior party in the coalition government, the centre-right Fine Gael party, has already said he is considering raising the level of adjustment for the 2012 budget to €4-billion from €3.6-billion currently.

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Mr. Stark's intervention, however, makes things difficult for Fine Gael's junior coalition party, Labour, whose leader said during the election campaign that a vote for them meant things would be done "Labour's way" rather than "Frankfurt's way".

Energy Minister Pat Rabbitte, a senior member of the Labour party, rubbished Stark's comments. "Arguments that we should further depress the economy because of an inflexible ideological position is not the way to go," he told state broadcaster RTE.

But fellow Labour minister Brendan Howlin, who is in charge of public spending, said Dublin had not yet decided what level of fiscal adjustment would be needed to get to a deficit of 8.6 per cent of GDP next year from an estimated 10 per cent in 2011.

Dublin is also under pressure from Europe and the IMF to raise more than the €2-billion earmarked by the government from the sale of non-strategic state assets.

Mr. Howlin said the government might consider a higher target if Dublin could use some of the proceeds to stimulate the economy.

A government-sponsored report earlier this year outlined potential sales of up to €5-billion said Dublin should sell parts of state-run energy companies the Electricity Supply Board (ESB) and Bord Gais, which have a total book value of €4-billion and €1.4-billion respectively.

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Mr. Rabbitte ruled out selling a majority stake in their transmission and distribution networks and said selling any part of either company would have to be carefully considered.

"They are the jewels in the crown," he said.

Ireland has cut public sector pay by an average of 15 per cent since 2008 but Mr. Stark said Irish and Greek workers were still better paid than their counterparts across Europe despite both countries being forced into emergency bailouts.

Mr. Kenny, elected to office in February, has vowed to honour the previous government's pledge not to cut public sector pay again and avoid forced job cuts as long as unions agree to voluntary redundancies and longer working hours.

Breaking this "Croke Park" deal could trigger industrial unrest and undermine Mr. Kenny's ability to get Ireland's budget deficit under an EU limit of 3 per cent of Gross Domestic Product (GDP) by 2015 from an estimated 10 per cent this year.

Mr. Stark said the Irish government should also look at adjusting the social welfare system, healthcare, pensions and private sector pay agreements.

Jack O'Connor, general president of Ireland's largest trade union, SIPTU, said workers would not stand for Stark's prescriptions. "It's a good day for Europe that he resigned," he said.

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