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CNBC Exclusive Interview: Irish Prime Minister Enda Kenny Speaks With CNBC's 'Squawk Box'

WHEN, CNBC EXCLUSIVE: Today, Friday, 16th May

WHERE: CNBC's Squawk Box in EMEA

Following is the unofficial transcript of a CNBC interview with Irish Prime Minister, Enda Kenny. Following is a link to the interview on CNBC.com: http://video.cnbc.com/gallery/?video=3000276266.

All references must be sourced to CNBC.

CNBC's Steve Sedgwick(SS): Taoiseach, very nice to see you again, we've talked before aboutthe recovery, about Ireland being a poster child for how to get out of aprogram and move forward as well, Portugal doing it as well now, but there isconcern in Portugal and possibly Ireland as well that it's a joyless recovery.Would you refute that?

Prime Minister Kenny (EK): Well I don't hold to this slogan of being a poster anything. When this government was elected three years ago, we inherited a catastrophic economic situation. The Irish have a trait of being very pragmatic, identify what the problem is, to find a strategy and go and do it. So we set out our plan to exit our bailout programme, and we're the first country to exit the bailout program, and we're the first country in the Eurozone to do that. But it came at a cost for hardship and financial difficulties and strained finances for hundreds of thousands of families in this country, not an easy thing to do. Bond yields have fallen from over 15 percent to 2.6. That's an extraordinary shift in such a short time. But it means while the recovery on paper is headed in the right direction, the consequences for many hundreds of thousands of families are still very real. That's why government this year is focusing on the indigenous economy to build the construction sector, the services sector, the retail sector, and to use the tax system within the budget to give flexibility where it can be shown that you've, you know, grown your economy to that point. So from a European perspective, small country, the tools were not available to help Ireland when we had to borrow 64 billion, 64 thousand million on the backs of our taxpayers, an extraordinary burden. So we were the first to exit, big signal for Portugal, Spain, Italy, and others, and we did exit without a precautionary credit line. So we set up a medium term strategy and that is very clear, the same as the plan that we had to exit the Troika programme, and that plan is to have our deficit below 3 percent by 2015, eliminated by 2018, and restore full employment of every lass by 2020.

SS: Taoiseach, to do that requires a lot more austerity, a lot more sacrifice from the Irish population. You're midterm, we have elections coming up, local by-elections plus European and parliamentary elections, but moving into 2015 and 2016 over the medium term, is the appetite for this stringent austerity, this sacrifice, and indeed of course with what happens in the run up to an election, is the appetite going to be there from both your party politically, your government politically and indeed from your people?

EK: Well I think austerity is a much abused word, I prefer to call it fiscal discipline or financial, financial competency. The mandate to me was two-fold. One, sort out your public finances, and two get your country working. Now we have 90 percent of the adjustment done, the last big imposition and challenge for people has been the bringing in of water charges, the last country in the OECD to do so. Evidence shows an extraordinary wastage of water through leakage and inferior infrastructure and so on. So the government are focused, absolutely focused, on finishing that the job people gave us and that's to have our deficit below 3 percent by 2015 and move on, have it eliminated by 2018. But at the same time to use the flexibility in an economy that is now beginning to grow, to show flexibility for taxpayers. Remember in Ireland, the marginal rate of 52 percent has hit by the industrial regime as 32,800, it's much too low, and the Finance Minister has said that his priority for the next two budgets is that if the economy continues to grow, if he's got the flexibility, he's got to show a response to people who have put up with a lot of challenges in the last three years.

SS: Sir there are comments saying that you do not have the flexibility for fiscal retrenchment as well, that high level of taxes, and increased levels of taxes, whether it be property taxes, water taxes, high marginal rates of income tax as well, they have to stay in place because of this catastrophic, huge level of stock debt the government has.

EK: Well these were part of the programme that we signed on for before ages of the bailout programme. 90 percent of people plus are compliant with the property charges and despite the sort of fears that there were at the very beginning, that there was going to be an extraordinarily high level of payment, people have been accepting of the ranges that have been set by government for the contribution to be made here. And the changes being brought at local government mean that locally-elected politicians are going to have to make the decisions about how that's spent, publish those audits so that people in this country will see what they're getting for the taxes that they pay. They will know the services and the quality of them that is being provided for them.

SS: Moving back to the point you raised about the rate that Ireland is having to pay for its benchmark financing, 10-year money, from 15 percent down to as you say 2.6 percent as well. Surely you don't trust the financial markets now, any more than you trusted them when they were charging you 15 percent? The irrational pessimism being replaced by irrational exuberance now. I mean the NTMA is raising its 2015 money, already having its 2014 money. You don't trust the financial markets, do you sir?

EK: It's a sign of the times that we've come from a point where objective opinion internationally are saying you have no integrity, you have no credibility, you have no word, you can't be trusted, to a point where they've gone from 15 percent to 2.6. As you know, the markets anticipate, they don't react. And they've made their judgement that this is an extraordinarily attractive country now for investment. We intend to keep it that way. I can't predict what markets will do in 12 months' time, or 6 months' time, or whatever, but we as a government are focused on completing the job that was given to us by the people, sorting out public finances and get our country working again.

SS: Do you not think they're fickle though? A market, an international system that anticipated catastrophe, to take to 15 percent, now, this ebullient atmosphere, you're cheaper paper than the United Kingdom, than the United States, sir?

EK: The comment is valid, but we also heard the talk about people being thrown out of the euro, people leaving the Eurozone, the collapse of the euro. We don't hear that anymore because of the changes made both by the European Council and the European Central Bank, so we're moving on here. And from that point of view, Ireland intends to hold firm, government have continued clear priority of what we have to do. As I say, at the same time as having to introduce those changes to reflect the objective opinion, that has brought about the change in objective opinion from 15 down to 2.6, we've shown flexibility in the tax system to give relief to employers, to provide credit for business, to open the doors of opportunity. It's a small country, we've got an extraordinarily flexible education system, which is actually able to gear up for the next waves of change that are coming. It is the young people in whom I place my confidence because of their competence, because of their enthusiasm, because of their capacity to meet the frontiers that are changing every week.

SS: But business wants more, more than what you've just offered. Ibec has said they want the government to show more ambition in certain areas of investment. But is the government loath to get involved in financing increased infrastructure projects, increased public expenditure projects at a time when you still have a debt to GDP ratio of over 120 percent?

EK: Well we had to borrow 64,000 million as you're aware. 32 million of that was put into the promissory note which the ECB (unclear) the well-performing programme here for Ireland. But we've built a sense of trust with the troika. That meant that instead of all of the proceeds of state assets being sold, going into relief of debt, we were actually able to put those into very worthwhile, sustainable job creation programs. Yesterday, government announced a 200 million further stimulus, from part of the proceeds from the sale of (unclear), that means motorways, it means housing construction, it means money for social housing because you've got a housing problem here. And yesterday as well we launched a major construction stimulus program, you see, and the construction sector in Ireland was operating at 25 percent of GDP during the so-called boom years. It's now operating at 6 percent, half of the European average. In 2006, this country actually completed 91,000 housing units. Last year it was 8,000, a collapse of 91 percent. So we've got to get that to a point where it's contributing 10, 12 percent of GDP and building you know, 25, 30,000 houses, and that's what that stimulus is about.

SS: I just got back from Paris. Guerria glowing. The big topic du jour out there is Thomas Pikkety, and the need for an inclusive recovery. Joyless recovery? The Irish population don't necessarily feel that they're enjoying the same recovery as corporates. why do you think that in Ireland and in other countries we're not seeing inclusion in the recovery?

EK: This is the focus of government, you're absolutely right, and the Irish people, the vast majority do not feel the joy, the confidence of the recovery, and that's because of the catastrophic incompetence, and light touch regulations that went completely astray a number of years ago.And the reason they can't feel the joy of it now is because they've had to pay that price. So that's why government in terms of its tax flexibility and the continued growth of the economy want to be able to repay people for scale of challenge that they've had to deal with. And that's why the foreign direct investment is very strong, we've built a very strong base now for indigenous exports in the food sector, in the agri sector in general, services, IT - these are areas that government are doing very well at. The stimulus for this year is on the construction sector, and services, and retail. And it's only by reducing the level of the live register, and we've had 22 consecutive months of fall in that now, which gives rising confidence in its own way, that extra, the extra resources made available to the people to begin to spend again. We want banks to deal with the remaining distressed mortgages, we want access to credit and have made we've made a whole suite of opportunities available for business and for entrepreneurs to get into business themselves. So we're very confident of that and we remain focused on dealing with the principles of our programme – 3% eliminate by 2018 and full employment by 2020.

SS: Your programme, free finance, why do you think the Irish people so unexcited about the European elections?

EK: I think you see the fact that you've had such a financial imposition because of the failure of banks and government, the previous administration to deal with this has imposed a lot of difficulty and hardship on our people. But remember this, we've been members for over 40 years; we've had referendum after referendum. In this country. The Irish population understand the relationship between the commission, the Parliament and the Council, that's why they understand the impact of the reform of the Common Agricultural Policy, putting 12 and a half billion into the Irish Agri economy between here and 2020. That's why they understand Ireland's impact in the presidency in bringing about the youth guarantee, 69 billion allocation to help young people get back to work. It's not that they're disinterested, they know now they're following the approval of the Lisbon Treaty. The European Parliament, the next Parliament has co-decision responsibility with the European Council in a whole range of areas.

SS: How will Ireland get real clout from European parliamentary elections, joined with the EPP?

EK: We're down from 12 to 11 in the party I lead is a member of the European People's party, which is the most influential bloc of the European Parliament. It's not a case of sending people out to the European Parliament to become windbags. It's a case of sending the people out there to…

SS: You could do that at home aswell.

EK: ...to join with people out there who are actually making decisions. And for me the process of the European Parliament and the European process is allowing the opportunity for the potential of Europe to filter through to the different regions of every country including Ireland. We haven't seen that yet. We have ambitious programmes now to connect fibre to 1100 towns and villages throughout the country, to connect the remaining areas to the motorways system and to improve the quality of services that we have here. And Europe over the last 40 years has transformed this country physically and from an infrastructure point of view and we want that to continue. And it has the market of 500 million on our doorstep. The final point I make about that, is that during our presidency we got the mandate from the European Parliament to begin discussions on the transatlantic trade talks with the United States, with the potential of several million jobs either side of the Atlantic. And I've always made the point at European Council meetings, this is not just another trade agreement, it is about setting out the conditions for world trade for the next 50 years.

SS: They don't really know much about the candidate.

EK: It's a big, it's a large spread 500 million people.

SS: Do you think they need a candidate closer to home?

EK: It's about growth, stability and jobs, that's what it's about. As one of the authors of the European People's Party programme, it's focused on those three principles. No politician in a European sense is happy with 26 million people unemployed. Nobody can be happy with 6 to 9 million young people unemployed. You have to give them hope and confidence and a sense of inspiration that the European process is actually about people, not about bureaucracy. It's about making political decisions that are effective. We've got enormous potential, phenomenal potential on our doorstep, which requires politics that makes that work, and that's what we try to show here in Ireland, that while there's a lot of pain, the reward at the end of this is career opportunities, prosperity and brighter days for everybody.

SS: Why do I see your name sir on the European Presidency speculation? And yet I read on domestic Irish websites that the smart money is backing Enda Kenny again, why does that keep coming up?

EK: I'd be flattered to be thought of in those August circumstances. My job is here, where not out of the forest yet, we've got a lot of challenges ahead of us. But government remains focused, we're grateful to the people for the challenges they've put up with, we see the rewards up ahead. Where 90% of the impositions have been made, it's just across the last few thresholds. I see really bright days ahead for our country, for our people.

SS: So I'll just get that denial again, you will not be standing for the Presidency?

EK: We've already made our candidate choice here in Dublin at the most exciting and vigorous convention in 20 years of EPP.

SS: I'm told you're a great friend of Angela Merkel and David Cameron wants you to do it.

EK: It's important to be great friends with these influential people at a European level.

SS: Alright, I'll take that as a no. You mention the catastrophe of the financial crisis. And yet once again it's getting quite bitter the debate about how we move forward, how we look back at what went wrong in the banking crisis. Peter Foil, Neil Martin have said your approach is unsophisticated, you're being politically partisan, you run the risk of collapsing the much needed banking enquiry. How do you respond?

EK: Well, they should be ashamed of themselves. They made a decision to give a blanket guarantee and made a decision about the banks in the middle of the night by incorporeal meeting. I'm not interested in that sort of philosophy. What I am interested in is that the Irish people should know the facts, they should know the truth, about the policies, about the personnel, about the institutional failure that led to this catastrophe because you've got to put in place a situation where that can never happen again. The politics can be left at the door, but the committee tasked with this scoping exercise and this opportunity to have compatibility of witnesses to attend - the Irish people need to know what happened. They need to be told the truth, they need to be able to find out the truth. Not because the committee is not about apportioning culpability, it is about determining facts. Courts are about culpability but here we need to identify what needs to be done to ensure that this can never happen again.

SS: The courts are failing to send people to prison. We've seen that recently again, that is what Irish people want to see. They do want to see some culpability and somebody taking the blame. Why is nobody going to prison sir?

EK: Well the case taken, it was a very complex technical case, but it was a judgement by peers, by people elected on a jury, and that's our system in this case. And I think the jury in that case did a remarkable job in what was probably the most technically complex case taken in the country. The independence of the judiciary and the court system in Ireland is sacrosanct, there is a system that goes through there that is just off-limits and it does its thing. In that case the jury made their point. But leaving that case aside, and there are others to follow, the people need to know what happened, the background, the circumstances, the evolution of the institutional failure, the evolution of political failures to put in place systems that will prevent that happening. This government has tried very hard to do that in the last three years. Independent fiscal councils, changes at the Irish Central Bank system, changes within the political system here. But we need to know, the people deserve to be told the truth and that's the purpose of this committee.

SS: Do you think this axis of collusion which you talk about is going to come into the open and people will see that the previous governments and the banks were working cap in hand?

EK: Well what I want to find out here what are the facts? What is the truth of what actually happened? So we need to go back beyond the decisions made by government, beyond the decisions made by the banks. We need to go back into the background to understand the triggers that led to the evolution of this situation which was catastrophic for people. You see when you knock on doors in an election situation and you meet the people, families destroyed, their children in America and Australia – this was the result of banking, political decisions that were absolutely incompetent, mis-managed and catastrophic for people. For me, politics is about fixing that therefore you must find the truth, you must put the facts in place and put a situation together where it cannot happen again. At the same time deal with the political problems of growing your economy and providing those young people with a sense of inspiration and hope that politics actually does work – I believe in that.

SS: Ukraine. The elections coming up on May 25th as well. There is a feeling when we look at European policy in the build up to events this year and indeed during it as well, that Europe has been divided. Europe has not treaded carefully where perhaps it should do where Russian interests are at their most paramount as well. Do you think Europe is now acting with a common voice? I see French deals still going on with Russia as well, do you think Russia needs to be a lot harder in terms of foreign policy?

EK: This is a very difficult situation, the issue with the Crimea and Eastern Ukraine is one that's been the subject of much discussion at a European Council level. The priority was to give the opportunity to the Ukrainian to join with Europe if that's what they wish to do, which is what they wish to do. But clearly when you talk to leaders from former eastern bloc countries, you see their dependence upon Russia for gas and for other economic developments. It's a balance here, and to try to say to Mr. Putin that this is not what you should be at, this is not about de-stabilising Eastern Ukraine, this about allowing for a prospect for people to determine themselves what is they want to do in free and fair elections. But Europe I think is committed that if this situation continues to worsen, Europe will have to take more serious action.

- ends -

For more information contact:
Hugo Foulds, Director of Communications, EMEA
CNBC
t: +44 (0)20 7653 9398
e: hugo.foulds@cnbc.com