Monday, January 24, 2011

Domestic Politics May Test European Resolve In 2011

by Richard Barley

Wall Street Journal

January 24, 2011

The collapse of the Irish government is a reminder that domestic political tensions could yet cause turmoil for Europe. Last year, European politicians and voters pulled together in the end to support the euro, providing bailout funds and introducing austerity measures. But the political challenges may grow over time, particularly as investors discriminate among countries.

True, an immediate crisis in Ireland seems likely to be averted. The Green Party, which pulled out of the coalition government Sunday, has said it will support legislation needed for Ireland to gain access to €67.5 billion ($91.9 billion) in international loans. The major parties are broadly supportive of the economic-recovery plan.

But the general election will almost certainly deliver a hugely different political landscape. Support for the ruling party, Fianna Fail, has crashed to just 8%, a poll for Ireland's Sunday Independent newspaper showed. That could leave the hard-left nationalist party Sinn Fein as the main opposition. An expected coalition between center-right Fine Gael and the Labour Party may seek to renegotiate some details of the bailout, including the current government's commitment not to restructure senior bank debt. Irish bonds and credit-default swaps only underperformed modestly Monday, but more volatility could lie ahead.


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