The Minister for Finance, Mr McCreevy, introduced a Budget last December which put too much cash into the economy, particularly through sharp cuts in taxation. It ran the risk of adding further to demand in the economy. As the EU Commission said in its statement yesterday, the cuts "will add to the overheating problem rather than abate it". That said, the decision by the Commission to seek a formal reprimand for Ireland's Budgetary policy appears a remarkably severe response. The Commission issued views both last year and the year before, calling for cautious Budgetary policy. It now feels that it should seek a formal statement by EU finance ministers reprimanding the Republic for pursuing an overly-expansionary approach. No doubt Mr McCreevy's dismissive response to its views have also helped prompt it into action.
The Commission must recognise that the Irish economy has been the best performing in the EU - by a distance - for some years. It has a strong Budget surplus and a sharply reducing ratio of national debt to Gross Domestic Product. Against this background, to single out the Republic's economy as the first candidate for a formal ticking off would be a bit heavy-handed, particularly if it were framed in very critical terms. The full text of the Commission's discussions has not been published. Presumably, however, its economic analysts realise that the main causes of inflation in the Republic's economy is not Budgetary policy, but rather the weakness of the euro and last year's rise in oil prices. True, demand generated in the economy was also a factor, but was just part of a much larger picture.
Fortunately the initial draft from the Commission, suggesting that the Government take specific corrective action - presumably through increasing taxes or reducing spending - does not appear likely to form part of the text discussed by the Ministers. This followed interventions from Irish EU Commissioner Mr David Byrne and others at yesterday's meeting. Significant reversals of the Budget tax cuts would be politically impossible, while there is a strong case to continue to increase spending to improve public services and invest in key infrastructure projects.
The push by the Commission to censure Ireland is part of a wider power play. It will see no threat to the euro zone from what is happening in the Republic's small economy, but will want to feel free to act in a similar way if bigger economies transgress in future. This highlights the wider issue of co-ordinating Budgetary and other economic policy in a single currency zone with 13 different member states. Taxes and exchequer spending remain a matter for national governments in the euro zone. The system of monitoring and discussion of these issues will take time to develop, but arguments and "reprimands" may well become common enough. For the moment, the Government here should be able to sit down and listen to the views of our European partners and take them into account in framing policy. The Commission and our EU partners - for their part - should realise that if we enter the arena of formal reprimands both sides will get into their own trenches and the normal and proper discussion of policy will be impeded.