ANALYSIS:Two EU reports say aspects of the recovery plan are "unclear" and "underdeveloped"
THE EUROPEAN Commission’s decision to recommend opening an excessive deficit procedure against Ireland today is not surprising given the state of the public finances.
Ireland currently tops the European league table for budget deficits with an 2008 estimate of 6.3 per cent of gross domestic product (GDP), which is more than twice the allowable limit set out in the EU’s stability and growth pact. The EU executive forecasts this could balloon to 13 per cent if no action is taken by 2010, prompting it to urge Ireland to “rigorously implement” a substantial, broad-based fiscal consolidation plan.
The EU stability and growth pact is designed to ensure the smooth operation of the euro currency by enforcing fiscal discipline on the 16 states sharing the currency. And with international investors fretting over the poor state of the economy in countries such as Ireland, Greece and Portugal, the commission is insisting on implementing the pact.
“The rules were established for everybody and must be respected,” said economic and monetary affairs commissioner Joaquin Almunia this week, amid new warnings that some euro area countries may need to be bailed out by their EU counterparts during this crisis.
Almunia has fought a long and tough battle with states such as France over whether the pact’s rules should be implemented during the current crisis. But there is a growing acknowledgment that failing to implement it could undermine confidence in the euro, although states are still divided over how long they should be given to reduce deficits.
In theory, persistent breaches of the stability and growth pact could result in a country facing an EU fine, but in practice this has never happened. The pact works by allowing fellow member states and the commission to exert peer pressure on governments to persuade, and sometimes help, them to implement reforms. It can, for example, help a weak government to persuade social partners that painful reforms must be undertaken.
What probably will prove more of a surprise for Minister for Finance Brian Lenihan is the EU executive’s criticism of the Government’s newly updated stability programme 2008-2013 and the doubts expressed over its ability to stick to its own budgetary targets.
The two commission reports, which are due to be debated by commissioners and published today, say elements of the recovery plan are “unclear” and “underdeveloped” and note it calls for sizeable fiscal consolidation without the supporting measures.
They also highlight how Irish policymakers failed to maintain “a prudent fiscal course” during the boom by regularly changing their budgetary targets, particularly on the spending side, in successive budgets. This tendency “might limit their ability to credibly commit to a consolidation strategy in difficult times”, concludes the commission report.
The EU executive makes no direct call for the Government to raise taxes, but it notes a commission on taxation was recently set up to recommend improvements to the taxation system. “The national authorities have indicated that the recommendations will feed into the decision-making process for the 2010 and subsequent budgets,” says the report.
The reports must still be debated and agreed by EU finance ministers before an excessive deficit procedure will be formally opened. But today’s analysis by the EU executive should provide a wake-up call to the Government, which has a special responsibility to ensure its actions do not undermine the euro’s stability.
