Kenny Suffers Biggest Defeat as Irish Unions Reject Pay Cuts

Photographer: Michele Tantussi/Bloomberg

Under Prime Minister Enda Kenny, Ireland is leading the race to become the first country to exit its bailout since the euro-debt crisis erupted in Athens in late 2009. Close

Under Prime Minister Enda Kenny, Ireland is leading the race to become the first... Read More

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Photographer: Michele Tantussi/Bloomberg

Under Prime Minister Enda Kenny, Ireland is leading the race to become the first country to exit its bailout since the euro-debt crisis erupted in Athens in late 2009.

Irish Prime Minister Enda Kenny suffered his biggest setback since taking power two years ago, as unions rejected his plans to cut pay for state employees.

The nation’s most powerful labor group, SIPTU, yesterday rejected government proposals to reduce salaries for some of the best-paid public workers by at least 5.5 percent. A wider vote of the union movement confirmed the rejection of the proposals in Dublin today, the Irish Congress of Trade Unions said, adding it would resist any unilateral imposition of pay cuts.

Ireland thus far has avoided clashes over government austerity measures compared with other crisis-hit economies such as Greece and Spain. Under Kenny, Ireland is leading the race to become the first country to exit its bailout since the euro-debt crisis erupted in Athens in late 2009.

“The rejection of the deal raises the prospect of industrial action and disruption in the public sector for the first time during this crisis,” said Owen Callan, an analyst at Danske Bank A/S (DANSKE), in Dublin.

Kenny had scored victories including winning lower interest rates on bailout loans, getting more time to repay them, as well as an agreement to ease the cost of the nation’s bank rescue. The government estimates that the rebuffed pay cuts would have generated annual savings of 1 billion euros ($1.3 billion) by 2015, as it seeks to tame the fiscal deficit.

‘Bottom Line’

Irish Public Expenditure Minister Brendan Howlin, responsible for making budget savings and negotiating the pay accord, told Dublin-based RTE yesterday he’ll have to explain the impact of the vote to the country’s bailout partners.

“The bottom line here is absolutely clear: We have to, we must and we will find 300 million euros of extra savings this year from payroll,” Kenny told lawmakers today. “That’s the challenge the government now faces.”

SIPTU rejected the proposals, which provide for at least a 5.5 percent pay cut on salaries exceeding 65,000 euros a year, with 54 percent of the votes cast. The labor union accounts for 25 percent of public-sector ballots on the accord.

“The result reflects the degree to which working people, and public-service workers in particular, are profoundly aggrieved at the way in which they have been required to shoulder the lion’s share of the burden of the adjustment while wealthy people are seen not to have contributed to the degree that they are capable of,” O’Connor told reporters.

Promissory Deal

In February, Ireland swapped so-called promissory notes used to rescue Anglo Irish Bank Corp. with 25 billion euros of long-term government bonds with maturities of as long as 40 years. As recently as last weekend, European finance ministers decided to give the nation more time to repay its bailout loans, adding to Ireland’s momentum.

The yield on Irish five-year debt was at 2.83 percent today, down from more than 17 percent in July 2011, when Moody’s Investors Service cut the nation to non-investment grade.

“There’s no question that this is a setback but it’s more like a skirmish than an event that changes everything,” said Austin Hughes, an economist at KBC Ireland in Dublin. “Ireland’s consensus model with unions has marked it out as being different from the more divisive circumstances we’ve seen in other countries pushing through austerity.”

‘Disappointed’

Ireland has so far avoided the large strikes that have beset Greece and Portugal even after successive governments cut state workers’ pay by an average 14 percent since 2008.

Kenny has now to decide if he wants to take on the unions. The government has said it may legislate for across-the-board public sector pay reductions if the proposals are rejected. He told lawmakers yesterday he was “disappointed” with the outcome, with opportunities for savings “limited.”

Gerald Nash, vice chairman of the parliamentary Labour Party, which governs in coalition with Kenny’s Fine Gael, told RTE Radio today that the government needs to “scope out the potential” for tweaking the deal.

“We are in unchartered territories now in the context of setting of public sector pay and public pay agreements,” he said. “It is not a situation that we have experienced before.”

To contact the reporters on this story: Finbarr Flynn in Dublin at fflynn3@bloomberg.net; Joe Brennan at jbrennan29@bloomberg.net

To contact the editor responsible for this story: Douglas Lytle at dlytle@bloomberg.net

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