Talks to start on makeup of Ireland's government

Two former Irish opposition parties were holding talks Monday about forming a new government to tackle the daunting task of rebuilding an economy battered by reckless property speculation and bank lending.

National broadcaster RTE said Fine Gael leader Enda Kenny, soon to be Ireland's next prime minister, and his Labour Party counterpart Eamon Gilmore had agreed to meet face-to-face later in the day.

"We don't want a situation where this is going to be dragged out," said Kenny.

The initiative rests with Fine Gael, which has won 70 seats so far in the 166-seat lower house of Parliament after Friday's national election. Results are not yet complete.

Labour Party has won 36 seats, its best ever showing, while the long-dominant Fianna Fail party suffered its worst election in 80 years with only 18 seats so far.

Fianna Fail was punished for leading the government as Ireland's property boom collapsed, banks tottered under bad loans and unemployment soared above 13 percent. To avoid bankruptcy, Ireland was forced to accept a euro67.5 billion ($92 billion) credit line from the European Central Bank, the European Union and the International Monetary Fund.

A Fine Gael-Labour coalition was widely expected after Friday's vote, but Fine Gael could also rule with the support of independents, who won 13 seats.

Gilmore is clearly eager to get his Labour party into government, arguing during the campaign that a coalition would best for Ireland.

"If Fine Gael want a government for a period of five years, strong, stable, that brings together the two largest parties ... the Labour Party is willing to play its part in that," Gilmore said.

"But I do say that the window of opportunity for that to happen is very narrow," he added, saying a deal should be completed before the legislature reconvenes March 9.

The bailout loan is contingent on Ireland cutting euro15 billion ($21 billion) from its deficit spending over the coming four years and imposing the harshest cuts this year, but Fine Gael and Labour have some marked differences over economic strategy.

Fine Gael is committed to cutting the government annual deficit to 3 percent of GDP by 2014; Labour wants the target moved to 2016. Fine Gael wants two-thirds of deficit reduction to come from spending cuts and one-third from taxes; Labour has advocated a 50-50 split.

Kenny says he will try to negotiate a lower interest rate on the bailout loan and make bond holders in Irish bank absorb a share of the losses. He has also promised to create 100,000 new jobs in five years.

Whether Ireland gets a Fine Gael-led coalition government with Labour or goes it alone with independents, analysts said more rocky times are ahead for Ireland and the European Union. Other EU nations are annoyed about bailing out Ireland while the island nation refuses to raise its low corporation tax rate.

"The major hurdle in any such renegotiating is more than likely to be a quid pro quo demand from many other EU nations on harmonizing corporate tax rates," said Mark Ostwald, strategist at Monument Securities in London.

"But with Fine Gael having committed to holding both the 12.5 percent corporation tax rate and the top rates of income tax, and the Labour Party being fiercely opposed to an EU wide harmonization of corporate tax rates, finding some common ground between the EU and Ireland looks very difficult."