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Bundesbank criticises Ireland's current account deficits habit

IRELAND'S economic policies pose a danger to the eurozone as a whole and we should take measures to improve the economy ourselves rather than look to others to change, the Bundesbank warned yesterday.

The German central bank criticised Ireland, Spain, Portugal and Greece for running "persistently high" current-account deficits over the past decade which the Bundesbank says is a "source of danger" for the single-currency region.

"These macro-economically erroneous trends" are "a source of danger for other member countries and the currency region as a whole," the Bundesbank wrote in its monthly bulletin. Deficit countries damage the eurozone's stability and "it is urgently necessary to correct maldevelopments and avoid a repetition in the future".

The Bundesbank blamed the current-account deficits in Ireland and elsewhere on increases internal demand, "comparatively" strong inflation and a "grave" erosion of competitiveness.

"The respective economies have no choice but to reduce domestic demand to a sustainable level," the Frankfurt-based central bank said. "A decisive fiscal consolidation is of central importance in light of dramatically deteriorating public budgets."

The unusually forthright comments came hours after Moody's downgraded Irish bonds and a day after Senator Dan Boyle of the Green Party questioned whether it was politically feasible to meet the European Central Bank's budget target to cut the annual deficit to 3pc of gross domestic product by the end of 2014.

A Department of Finance spokesman responded yesterday that government policies had led to a significant improvement in Ireland's competitiveness and reiterated government forecasts that Ireland's current account balance of payments would "move into surplus during 2010 and increase significantly in the coming years".

Germany, which runs a current account surplus and relies heavily on exports to drive growth, has come under pressure from some other countries including France to boost domestic demand to help address the economic imbalances in the eurozone.

The Bundesbank dismissed the suggestion yesterday; saying it would only help countries which are already exporting successfully within the euro-zone and would be little to help Ireland and other countries running current account deficits.

Ireland's current account deficit would only improve by 1 percentage point if Germany increased imports by 10pc, the Bundesbank said.

The current account balances in Spain, Portugal and Greece would only improve by a more meagre 0.25pc, it added.

The bank also said that euro-zone monetary policy was aimed at securing price stability for the currency bloc as a whole.

"That means, that it generally should not take consideration of the economic problems in individual states," it added.

Irish Independent