Friday 23 February 2018

Tough new eurozone budget rules mean troika is still watching

Members of the Troika pictured leaving the Department of Finance with other officials from the Troika on one of their final visits to Dublin
Members of the Troika pictured leaving the Department of Finance with other officials from the Troika on one of their final visits to Dublin
Colm Kelpie

Colm Kelpie

WE'RE out of the bailout but not out of the clutches of the troika just yet.

Europe has made clear they'll be keeping a close eye on us, with twice-yearly reviews until at least three-quarters of the money has been repaid.

But Finance Minister Michael Noonan has repeatedly pointed out we'll be under enhanced scrutiny anyway thanks to new European rules drawn up at the height of the crisis, known as the Six Pack and Two Pack.

The aim is to dig out any potential problems before they get a chance to rear their heads and threaten the euro.

It may add weight to arguments from some quarters that Brussels has too much power; unelected officials judging the affairs of sovereign states. Others see it simply as prudent financial management.

So what impact will the new rules have on the budgetary timetable in Ireland?

As a member of the EU, Ireland is subject to the Stability and Growth Pact, under which Ireland must reduce the budget deficit to below 3pc of the value of the economy.

Government debt-to-GDP levels across EU member states must also not exceed 60pc. Ireland's debt is expected to peak this year at 122pc, before falling to 93pc by 2020.

If a country exceeds these limits, such as Ireland, it has to introduce measures to bring them back under control.

In the case of excessive debt, the GDP ratio must be reduced by at least 1/20th per year on average, although that rule will apply fully to Ireland from only 2019 onwards. In the interim, the Government must show it's doing all it can to slash the debt.

No compliance with the rules will result in fines and funding being withheld.

FORECASTS

TDs and senators have already signed off on the new budgetary and debt rules, which contain two major events each year -- the Budget and the Stability Programme Update (SPU).

It all begins with the SPU in April, which sets out fiscal policy together with the economic and budgetary performance outlook for the economy over the medium term. The document provides the first formal opportunity for updates to the forecasts from the last Budget. Updated projections for the current and following three years are also submitted to the State's budgetary watchdog, the Fiscal Advisory Council.

In June, Mr Noonan will prepare a Budgetary Strategy Memorandum for the Government, updating the budgetary and economic outlook and pointing out any risks to the targets.

Then in September, the various departments set out their spending plans and Brendan Howlin gets the chance to either wield the axe, or be generous. Updated macroeconomic forecasts are once again submitted to the Fiscal Council.

The Budget, previously held in December, must be announ-ced on or before October 15.

All euro-area states not in a bailout programme must submit their draft budgetary plan to the European Commission and the Eurogroup of eurozone finance ministers.

Monitoring assignments are completed by both the Commission and the Fiscal Council, after which the Commission will give its verdict.

If the Commission believes the State is at risk of serious non-compliance with the European budgetary rules, it can ask for a revised plan.

The enhanced Budget scrutiny took place across Europe for the first time this year, but Ireland wasn't included as it was still in a bailout.

It was a useful exercise and a reminder that the eurozone's major players are far from perfect, with a startling number of countries singled out for criticism and facing claims that they are at risk of non-compliance with the tough new rules.

France, the Netherlands and Slovenia just about made the cut, while Spain, Italy, Luxembourg, Malta and Finland were given slaps across the wrists.

There was also a gentle reminder for eurozone giant Germany -- which was already under pressure over its trade surplus and the need to boost domestic demand -- that it had to do more to address structural reforms.

The rules set out a clear timetable of what must be achieved, and published. Closer scrutiny is no bad thing.

Irish Independent

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