Brussels still shaping Ireland’s economic strategy

Paschal Donohoe, our new Minister for Finance, got his marching orders in Brussels this week. Well, sort of.

Two precooked reports on Ireland were approved with barely any discussion (at this stage anyway) – one by the 20 eurogroup ministers on Monday, and the other, the full 28 Ecofin group on Tuesday. They spelled out clearly – more or less off the same hymn sheet, it would seem – the detailed economic strategy that our partners expect of us and will colour both Donohoe's summer statement on Thursday and the next budget.

Donohoe and his predecessors know that, as a character in The Godfather put it, the recommendations are the sort of offer you can't refuse

They come as strong recommendations, not mandates – "a framework for co-ordination", is how the European Commission puts it – unlike the the "excessive deficit procedure", an action that may be launched by the commission against any member state that exceeds the budgetary deficit ceiling imposed by the EU's Stability and Growth Pact legislation.

(Good news: Greece, which has turned its 2009 15 per cent of gross domestic product deficit into a 0.7 per cent surplus in 2016, is this week seeing commission proceedings against it dropped).

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Future leeway

But Donohoe and his predecessors know that, as a character in The Godfather put it, the recommendations are the sort of offer you can't refuse. Not if there is any chance that you will be looking for some leeway in the not-too-distant future – or even handouts.

And not that the finance ministers of Europe’s more fiscally conservative states want to refuse. It has been observed more than once that ministers find the phrase “required by Europe”, whether entirely true or not, a most useful shield for deflecting the profligate demands of some of their high-spending colleagues.

Take the following recommendations, first from the European Council’s opinion on the 2017 Stability Programme of Ireland, a conclusion of its 2017 “semester” programme of member-state budget supervision: “Use any windfall gains arising from the strong economic and financial conditions, including proceeds from asset sales, to accelerate the reduction of the general government debt ratio. Limit the scope and the number of tax expenditures and broaden the tax base.”

Or to put it another way, as the seventh post-bailout surveillance (PPS) review mission for Ireland argues, watching for any slippage in our head-of-the-class ways: “The general Government deficit continues to decline, yet the underlying fiscal effort diminished in 2016. This reflects the Government’s policy of exhausting all available fiscal space, which received a boost from corporate tax windfalls in 2015-2016. In the future, it would be prudent to use such funds to accelerate deficit and debt reduction.”

‘Dangerous’ voices

The mildest of criticism, accompanied by a firm clap on the back. Well done lads! It's as if the commission's various missions were responding conveniently to "dangerous" voices in Ireland urging that some of any exchequer windfalls – AIB comes to mind – be spent on badly needed infrastructure. Surely not?

This is after all an expert voice from outside, removed from the hurly burly of politics, setting out to establish a. whether our debt repayments are sustainable, or b. whether the economy is heading in the right direction (ie the same question asked in different ways).

Objective advice. Or is it? Take the following “semester” advice: “There is scope for a shift toward more sustainable and growth-friendly sources of revenue. The planned ‘rainy day fund’ and the announced 45 per cent public debt-to-GDP target go in the right direction . . .”

Sound familiar? In truth budgetary co-ordination is less about collective mutual supervision than a complex self-reinforcing dialogue between member states’ finance ministers and their officials and the commission, refining documents to make them palatable, and answering questions – I’m glad you asked me that question – in a way that each will find comfortable.

Some gentle admonitions are thrown in for plausibility’s sake: “Concerns remain that the draft Bill enabling the Central Bank of Ireland (CBI) to cap interest rates on variable rate mortgages, if enacted, could have negative implications for the transmission of monetary policy, financial stability and bank competition . . .”

Donohoe should not be altogether surprised, however, if he found Michael Noonan’s name at the bottom of the letter from the commission. And this is the future – the priorities here, above all, even some say above Brexit, or because of Brexit, are the strengthening of economic co-ordination, the completion of the single market, the capital markets union and the banking union, and competitiveness of the digital economy.