News Brendan Keenan

Friday 29 August 2014

We could lose out in new EU bid for debt harmonisation

Published 19/06/2014 | 02:30

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Brussels is forecasting 3pc growth next year

IT must be some kind of a first. So big was the attendance, they had to bring in extra chairs for a seminar on – wait for it – the EU Commission's country specific recommendations for Ireland.

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Full houses are not what one expects for such a topic. It is important, of course, but it is not easy.

Even though the assembled brainpower of the audience could light a small town, there was a feeling that they also wanted to know more about what exactly is going on.

At the Commission offices, they will have been chuffed by the level of attendance. They are to get an extra official to help educate the Irish public on Europe's enhanced role in the budgetary process. Good luck.

The ways of the EU are indeed passing strange. Did you know, for instance, that the commission forecasts for the economy next year are based on an assumption that the Government will not fully apply the promised €2bn in taxes and spending cuts?

While Brussels is sternly demanding that it do, its forecasts are based on something less. This is because the commission only counts measures which have already been spelt out in detail. As we know, much of the €2bn has not.

This leaves the curious situation that Brussels is forecasting 3pc growth next year, while the Department of Finance, taking the official position that it will be a €2bn adjustment, has lower growth of 2.7pc. This bit of small print is a gift to the anti-austerity brigade in the acknowledgement that these adjustments harm growth.

The Government is not happy. John McCarthy, chief economist at Finance, told the seminar that the Government disagrees with the commission's view that adjustments should be laid out in advance in considerable detail, and regarded as binding.

That is how it was done with the troika. I wondered at the time whether Government would abandon the level of precision in the troika programme, especially over a 12-month period, but I was not surprised when it did.

Politicians believe that this sort of thing presents targets for opposition and vested interests to shoot at, making the process more politically difficult. But thing are not exactly politically easy since the troika left, are they? The fact is that the Coalition's popularity has plummeted since it was able to apply its own obscure methods.

No doubt this was partly because the public felt that the Government had few choices during the bailout. But it is also the case that the medical card business was a surprise, and that, in line with conventional wisdom, every effort was made to avoid detail on water charges until the last possible moment. It does not seem to have succeeded.

Conventional political wisdom – in both Brussels and Dublin – is also struggling to cope with the new realities that were the subject of the seminar. Former finance minister Alan Dukes – the last man to face a task like Michael Noonan's – broke with convention to launch a blunt attack on ECB monetary policy and the commission's lack of comment on the matter.

One could sense a frisson of unease in the audience. It is not done to challenge EU institutions in the way, say, that an opposition would challenge a government. To do so is to be seen as a eurosceptic – someone who opposes the project itself.

No one could say that about Mr Dukes, who cut his political teeth in Brussels and is a former director of the Institute of International and European Affairs in Dublin. Like many of the attendees, and the commission itself, he wants the new budgetary processes to become part of the warp and woof of domestic politics. Unlike some, he recognises the implications.

There was the usual ill-informed whining about Brussels telling us what to do. This is now part of Brussels' job, given to it by the member states as part of the effort to avoid the enormous dangers of a euro break-up. Any whining should be about what the commission says, not its right to say it. That kind of whining is both legitimate, and necessary.

The EU is a big boy now. It has a monetary union, a fiscal union and is supposed to get a banking union. It can no longer hide behind the claim that these institutions are so fragile that they must be treated with kid gloves.

They are right to say that the institutions are fragile, but it is too late to worry about that now. They are so ambitious in their scope that they cannot be sheltered from the rough and tumble of political argument. The correct response is not to stifle dissent but to make the system stronger, by making it simpler, more logical and – something they lack – more European.

The ECB has patently failed to be a eurozone central bank. It has found endless excuses to ignore overall euro area data, both during the boom and now in the bust. It is not even necessary to feel that it favours bigger states over small to think it a huge mistake to bother about conditions in individual states at all.

As Mr Dukes said, while monetary policy is a mystery, fiscal conditions are set in stone and operate only at member-state level.

No economy can be run successfully on that basis. Individual states do have to follow different fiscal paths, and Ireland's seems the least that can be asked of it. But someone must take responsibility for the overall eurozone fiscal stance.

As it happens, Ireland is involved in a developing row over some of the most important of these issues. After 2016, instead of cash targets for borrowing, such as 3pc of GDP, there will also be a theoretical target to ensure there is no deficit if the economy is growing at a normal rate.

Here, there is too much Europe, of the wrong kind. A standard measure is used to get round the obvious danger of countries massaging their figures, but the fact is that each economy is different when it comes to what is normal. Ireland is particularly odd and could lose out more than anyone from this piece of harmonisation.

Battle has been joined. It would be nice to think it would be conducted in a civilised, open manner, with informed argument and conclusions based on the evidence, rather than ending in some irrational compromise in the watches of the night at an EU summit. Now that really would be a first.

Brendan Keenan

Indo Business

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