EU warns of harsher Budget as growth is slower than forecast
THE EU said next December's Irish Budget may have to be harsher than planned, as the country's economy grows less than forecast.
While the Government claims that gross domestic product (GDP) will expand by 1.3pc, the European Commission now expects the economy to expand by just 0.5pc. In November, the EU predicted growth would rise 1.1pc.
The commission's economics chief, Olli Rehn, told reporters yesterday that the final decision would be left to officials from the commission, ECB and the IMF, once they have completed a "more in-depth assessment" of the country's economic situation. The officials are due to return to Ireland in April for the IMF's sixth bailout mission.
"We conduct our more in-depth assessment in the context of quarterly reviews and we will do so next time we conduct a review," Mr Rehn said when asked whether Ireland needed to make extra savings.
Finance Minister Michael Noonan has pledged to shave €3.8bn from the deficit this year to meet an 8.6pc of GDP target.
Further cuts would be a blow to Mr Noonan, who ignored advice from the new Fiscal Advisory Council to adopt a more austere Budget this year.
Despite the word of caution, Mr Rehn said the bailout was working for Ireland by restoring faith in banks and government, with a positive knock-on effect for growth and jobs.
"Overall, the Irish economy has been recovering, in which the EU/IMF programme has been helpful, both in terms of providing financial assistance to the sovereign and by including a very significant package of restructuring and recapitalisation of the banking sector," he said, "which has been essential in terms of restoring confidence into the Irish economy and thus it is crucial for the current and future improvement of growth and job creation in the country."
The commission followed in the footsteps of almost every other reputable forecasting organisation by predicting that growth in the Irish economy this year would be a fraction of official government forecasts.
In its analysis the commission said Ireland's exports would slow and domestic demand would continue contracting. The number of people out of work will rise once again this year as the public sector and financial sector sheds jobs. The unemployment rate would probably remain stable as people dropped out of the workforce or emigrate, it added.
While the commission's forecast has been downgraded it would still be better than the 0.3pc contraction predicted for the rest of the 17-nation eurozone. Battered Greece is seen entering its fifth year of economic contraction and Spain and Italy are seen contracting by around 1pc.
Mr Rehn said austerity plans were working, despite the prediction that the eurozone would enter its second recession in three years.
"The programmes in Portugal and Ireland are on track, Italy and Spain are implementing important structural reforms," he told reporters in Brussels.
The EU's executive also predicts that the wider, 27-nation European Union will not manage any growth this year. With the eurozone's sovereign debt crisis moving from a chronic to an acute phase, the EU's top economic official warned that there would be little clemency for heavily indebted countries who must meet strict targets even as their economies stall.
There seemed to be some leniency when it came to Spain, however. "Member states facing close market scrutiny should be ready to meet budgetary targets," Mr Rehn said when defending his strategy of tough love for countries that live beyond their means.
But he suggested Spain's 2012 deficit target of 4.4pc may be allowed to rise once all available data was gathered by the EU's statistics agency Eurostat.
"The full information of budgetary figures will be available in the March notification, which will be then validated and (published) by Eurostat in April. On that basis, we will work with the Spanish authorities and decisions will be taken once we have a full picture," Mr Rehn said.
Economists are increasingly questioning the EU's strategy for southern Europe as austerity reaches such extremes that some indebted town halls are unable to pay staff, social services shutter and joblessness reaches record levels.
But the commission said budget cuts were the way to regain investor confidence.
Negative feedback loops between weak sovereign debtors, fragile financial markets, and a slowing real economy do not yet appear to have been broken.
The latest forecasts could still worsen. They rely on the assumption that EU leaders will act to resolve the sovereign debt crisis, which is now in its third year and has shattered investor confidence in a region once regarded as one of the world's safest havens. (Additional reporting Reuters)