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Ireland may need mini-budget if other economies falter: official EU report

The European Commission signs off on a €5.9 billion release of bailout funds, but their green light comes with a warning…

Image: Niall Carson/PA Wire

THE EUROPEAN COMMISSION has formally raised the prospect of Ireland needing to introduce a mini-budget later in the year if the economies of its major trading partners continue to falter.

The prospect is raised in a report published by the Commission this morning, as part of its review into Ireland’s progress under the bailout programme, alongside the news that the Commission was authorising the release of €5.8 billion in bailout funds.

The release means the EU has now provided Ireland with €32.2 billion in financial assistance under the EU-IMF programme since it was agreed in late 2010.

In its report – which was controversially presented to members of the German parliament yesterday, before it was formally published by either the Commission or the Irish Department of Finance – the Commission warns that Ireland’s expectations for growth could “deteriorate significantly” if its main trading partners slide into recession.

“Although the fiscal forecasts incorporate some small buffers, a further  deterioration of the macroeconomic backdrop could require additional fiscal tightening later in the year,” the report states.

The report also raises concerns that Ireland’s plans to return to the bond markets in 2013 could be threatened by any “adverse developments” elsewhere, which could drive further investors away from the bond markets:

The incipient incipient improvement in market sentiment vis-à-vis Ireland remains fragile, and could evaporate in case of adverse developments elsewhere, putting at risk a return to market funding.

The European slowdown could also mean that the State-supported banking sector could find it difficult to deleverage and downsize their operations, which in turn delay those banks’ return to the open bond markets.

It also raises concerns that the new insolvency legislation being proposed by justice minister Alan Shatter, “while necessary, could generate expectations of debt forgiveness, despite the government consistently ruling out blanket forgiveness”.

This, in turn, could lead to a culture where people are less willing to repay their loans and threaten the ability of the banks to wean themselves off State support.

Positives

The report does, however, underline some positives – remarking that last year’s budget deficit was 10 per cent of GDP, well below the 10.6 per cent limit set down under the Troika rules.

It also notes that Ireland had made “major progress” in downsizing the banking system, and that banks had met their deleveraging targets for 2011 despite the tough environment in the banking sector.

In this Dáil this morning, Eamon Gilmore expressed dismay that the report had been given to members of the German parliament before it was formally published in either Dublin or Brussels.

He also insisted that a mini-Budget would not be necessary, despite the Commission’s warnings: ”A mini-Budget will not be necessary – so I hate to disappoint you on that. It will not be necessary,” he insisted.

The Tánaiste said the matter of the document being leaked had been raised with both the German finance ministry, which supplied the documents to the members of the Bundestag, and with the Commission itself.

“I intend to pursue the issue myself, and I intend to discuss it with our ambassador in Berlin, to ensure that the way in which this document was handled is not repeated,” Gilmore said.

The documents are not the first to have been presented to German politicians before their official publication: in November a draft edition of the latest memorandum of understanding was given to members of the Bundestag’s budget committee before it was published.

That document included news of the Irish government’s plan to raise the top rate of VAT by 2 per cent to 23 per cent in the 2012 Budget – ahead of the schedule laid out by previous versions of that document.

In full: The European Commission’s report on the Irish bailout (PDF) >

Read: European Commission insists referendum ‘No’ vote will not affect current bailout >

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