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EU: Finance Ministers Criticize Success-Story Ireland

European Union finance ministers have issued an unprecedented rebuke to Ireland over its budgetary policies, which the ministers see as inflationary and a threat to stability in the euro zone. This is the first time the EU has singled out a member state for such sharp criticism of its economic policy, and Ireland, the star economic performer in the EU, is angry. The public row raises, among other things, the question of the motives for singling out one of the smallest member states.

Prague, 13 February 2001 (RFE/RL) -- The European Union's 15 finance ministers, meeting yesterday in Brussels, criticized Ireland's budget for 2001 on the grounds that its tax cuts and pubic-spending programs will fuel inflation.

In a sharply-worded statement, the ministers said the budget is inconsistent with the broad guidelines of the EU's economic stability program, which has been agreed upon by all 12 euro-zone members.

In issuing their criticism, the ministers accepted a recommendation by the European Commission. This marks the first time the commission has singled out an EU member for such a stinging rebuke of its economic policy, and the Irish are offended. All the finance ministers at yesterday's meeting -- except Ireland's Charles McCreevy -- accepted the commission's recommendation without putting it to a formal vote.

For his part, McCreevy ruled out making any change to Ireland's budget for 2001 to accommodate the commission's concerns. He says he finds it "difficult" to understand why Ireland has earned any criticism at all, given the amazing performance of its economy.

Ireland's economic growth this year is expected to be 8 percent, well above the EU average, and unemployment is practically non-existent. McCreevy notes the tax cuts and state spending measures contained in the budget have been agreed upon with labor unions in return for wage restraint. He says the policies are necessary to ensure social harmony. Such packages are an integral part of the Irish success story because they are designed to keep wages low and attract foreign investment.

But Ireland's pace of economic growth has been so high in recent years that labor shortages have emerged, leading to private-sector wage pressures and inflation. Inflation is now running at about twice the EU's target rate of 2 percent a year. Gerasimos Thomas, the spokesman for EU Finance Commissioner Pedro Solbes, gives full credit to Dublin, but he points to what he sees as a risk yet to be addressed:

"Ireland has had an excellent economic performance in terms of growth, in terms of reduction of unemployment [and] in terms of achieving surpluses of the budget. But the fiscal policy has been creating an inflationary problem in the Irish economy, with possible spillover effects for the euro-area economy."

Thomas says it seems to the commission and the rest of the member states that the new budget does not pay sufficient attention to calming down these overheating risks. And he says:

"It's not necessarily that one has asked for a change in the budget. The council [of finance ministers] has asked [Dublin] for a budgetary policy that by the end of the year delivers results in terms of putting down the overheating. So there are a number of options available to the Irish authorities."

Thomas says EU officials will monitor the situation closely this year to check that Dublin is complying with the recommendation. He acknowledges the commission has no means of forcing the Irish government to comply, but he says there is important peer pressure -- something which has worked in the past.

For their part, many Irish feel their country, which accounts for only about 1.5 percent of the EU's total gross domestic product, is being unfairly singled out. After all, as investment adviser Rob Kellaher puts it, it's hard to call Ireland fiscally imprudent considering it's running a substantial budget surplus and is rapidly cutting its national debt.

Dublin-based Kellaher says the real reason for the censure from Brussels lies elsewhere:

"I don't think the EU Commission particularly cares per se what Ireland does because that won't have any great impact on anything [in the broader euro-zone]. But it's just that if the process [of the economic stability program] is seen to be breached in one case, then it may be breached at a later date in a more serious case."

In other words, Ireland is being punished to ensure that bigger member states are aware of what would be in store for them if they too neglect the terms of the economic stability program. For instance, inflationary policies by EU giants like France or Italy would have a big impact on the euro-zone.

Finance Minister McCreevy is thinking along the same lines. In an interview with Britain's Financial Times yesterday (Feb 12), he said the Commission has used the opportunity provided by Ireland to make a broader point. That point, McCreevy said, is to warn the bigger EU members to tighten their belts amid signs the pace of fiscal consolidation may be slowing across the EU.