Berlin backs fiscal council’s austerity stance

Berlin has backed the Irish Fiscal Advisory Council’s warning about the dangers of the Government departing from its path of consolidation and reform.

In a paper the federal finance ministry said Ireland’s “awareness of its problems and reform courage” were crucial in identifying and tackling its challenges. All the more reason, it added, not to let up now with consolidation.

“I would be unrealistic to expect macroeconomic imbalances built up over a long time to be addressed in a short period,” the paper noted. “Instead Ireland will have to continue further down the path it has chosen to secure lasting reform success.”

On Ireland’s to-do list, Berlin prioritises the continued reduction of public and private debt. Bringing the public deficit below the EU ceiling of three per cent of GDP, it added, “does not mean Ireland has reached its goal”. Looming next year, it points out, are medium-term budgetary goals laid down in the stability and growth pact. Under this, Ireland has undertaken to present a structurally balanced budget by 2018.

“This will require further progress,” the report notes, “such as shifting the loss-making health system onto a sustainable footing, organising the civil service more efficiently, reforming the justice system and give an adequate binding nature to medium-term budgetary planning.”

Given Ireland’s open economy, and thus its susceptibility to external shocks, the report urges the Government to err on the side of caution in its budgetary planning.

“As such the independent Fiscal Council is to be supported in its recommendations for further consolidation measures in spite of the current positive tax takings, as well as advising against tax cuts that are not counter-financed.”

The German report views the reduction of Ireland’s debt as crucial to stimulating consumption and investment, and urges the implementation of simplified insolvency rules to allow non-performing bank loans to be restructured or written off.

Berlin officials urge the Government to push the reprivatisation of Irish banks in the medium term, noting that they are once again trading profitably and have regained access to finance markets.

“This raises the hope that the Irish state can take back a part of the funds used to support the banks,” notes the paper. “Renewed support from the public sector is not discernible at the moment.”

With this, Berlin appears to be drawing a line through Dublin’s oft-cited ambition for the ESM bailout fund to take stakes in Irish banks and refund taxpayers. Such an ESM investment would be technically possible once the EU banking union is up and running fully, but the prospect has never enthused Berlin politicians.

Finally, the Berlin report underlines the importance of Ireland’s international companies being part of a “competitive and simultaneously fair tax system”.

“It is in the mutual interest of Ireland and its partners that these firms pay appropriate taxes in their base country,” said the report. “Only in this way can national and international-operating firms compete fairly with each other, and only in this way can a state’s essential tasks be financed.”

The report praises the decision of Ireland to abolish from next year the “significant (tax) configuration” strategy known as the “Double Irish”.