IMF urges Ireland to cut jobless pay, minimum wage

A Sinn Fein protestor waves the Irish tricolor following clashes with police officers after breaking through the gates of Government Buildings, in Dublin November 22, 2010.

WASHINGTON (Reuters) - Ireland should gradually lower unemployment benefits and cut the level of its minimum wage in order to boost employment, the International Monetary Fund said in a paper released on Monday.

The paper, approved by Ajai Chopra, the IMF's mission chief negotiating terms of a joint rescue package with the EU in Dublin, said Ireland should introduce stricter job search requirements, give more resources to unemployment agencies to promote job search assistance, and review the level of minimum wage to make it consistent with a general fall in wages.

The IMF also urged Ireland to improve competitiveness to promote exports as a sustainable source of growth by reforming planning and licensing systems in network industries and focusing public resources on high-priority projects in the knowledge-based economy.

The recommendations set out in a 25-page staff position note on priorities for rekindling growth in the euro zone come as Ireland negotiates a multi-billion euro EU/IMF rescue package.

It was not clear whether the report was completed before Dublin invited a joint EU/IMF mission in for talks about a bailout last week.

The IMF also urged Spain to lower severance pay on permanent contracts to at least EU average levels and relax restrictions in the rental market.

For Portugal, it recommended the country cut severance payments and resume the privatisation process.

EU policymakers fear that debt crises first in Greece, now in Ireland, could soon envelop the likes of Portugal and Spain.

COORDINATION

The IMF called for a "comprehensive approach" to revive economic growth in the euro zone, including reforms that make better use of the labour force and boost productivity.

It called for a strengthened financial system and sustained financing for investment. It also urged more policy coordination at the EU level to drive the reform agenda.

In the aftermath of the crisis, boosting growth is essential to prevent unemployment from becoming a long-term problem and to facilitate the return to fiscal sustainability," the IMF said.

"There is little excuse for relatively low labour productivity, a particular bane in southern Europe and an increasing challenge everywhere."

The IMF report said since early 2008, the euro zone lost about 2.5 percentage points in per capita gross domestic product relative to the United States and barely kept pace with Japan, even though Japan's recession was more severe.

While acknowledging that each country is different, the IMF said southern Europe needed to focus on becoming more competitive, while some "core" countries in the euro zone should promote higher labour force participation or open up their service sector markets further.

The Fund said in the past, reforms in the euro zone were more successful when driven by European institutions that oversee the euro zone rather than through peer pressure from other countries.

EU diplomats say there was widespread irritation at a recent Franco-German accord on new EU debt rules which was presented to euro zone partners as a fait accompli.

"More reform authority should be vested at the euro area level and countries should be willing to adjust national policies to secure an effective functioning of the economic and monetary union," the IMF report said.

It said changes should be included in a stronger surveillance mechanism over fiscal and structural policies; EU transfer rules revised to reward reformers and punish laggards; and more efforts made to ensure countries abide by the rules.

The IMF said a drive for a common labour market would revitalize the euro zone.

(Reporting by Natsuko Waki and Lesley Wroughton, editing by Mike Peacock)