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At the Ecofin Council in Brussels, 12 February 2001 the Council of the European Union, continuing its cycle of annual reviews of Member States Stability or Convergence Programmes, examined the programmes of Denmark, Ireland, Greece, France, Italy, Austria and the United Kingdom. The Council adopted its opinions on these programmes as well as a Recommendation concerning Ireland. This Recommendation contained an unprecedented formal criticism of a Member States' budgetary policies.
Background
As a result of treaty changes made by the Treaty on European Union in 1992 it became a formal objective of the European Union to move towards economic and monetary union . Amongst the articles hereafter incorporated in the Treaties establishing the European Communities (and taking into account the renumbering of Treaty articles after the Treaty of Amsterdam came into force in 1999) are Articles 98-104 concerning economic policy. In particular, the procedures for economic policy co-ordination are important.
Article 99 says:
Member States shall regard their economic policies as a matter of common concern and shall coordinate them within the Council...
In order to ensure closer coordination of economic policies and sustained convergence of the economic performance of the Member States, the Council shall, on the basis of reports submitted by the Commission, monitor economic developments in each of the Member States and in the Community as well as the consistency of economic policies with the broad guidelines ... and regularly carry out an overall assessment.
Where it is established ... that the economic policies of a Member State are not consistent with the broad guidelines ... or that they risk jeopardising the proper functioning of economic and monetary union, the Council may, acting by a qualified majority on a recommendation from the Commission, make the necessary to the Member State concerned.
Subsequently, as part of the continuing process of moving towards economic and monetary union a Resolution was adopted, and two Regulations agreed, at the European Council, Amsterdam in June 1997 laying down the firm commitments of the Member States, the Commission and the Council regarding the implementation of a Stability and Growth Pact . The Regulations were intended to establish the procedures and mechanisms for ensuring budgetary discipline amongst those EU Member States moving towards EMU. In particular, the Regulations set out a framework for effective multilateral surveillance and gave precision to the excessive deficit procedure.
Further information on the background to the mechanisms in place, which have led as part of the ecomomic policy coordination process to the formal criticism of the Irish budgetary policy by the Council of the European Union, can be seen on the pages of the European Commission's Directorate-General for Economic and Financial Affairs website outlining its activities and priorities :
Broad Economic Policy Guidelines
The Broad Economic Policy Guidelines (BEPG) (Article 99(2)) is the reference document guiding the conduct of the whole range of economic policies in the Member States and the Community. Member States regard their economic policies as a matter of common concern and co-ordinate them in the context of the BEPG. The BEPG lay down both general economic policy guidelines as well as country specific policy guidelines ... The BEPG are adopted annually and evolve each year in line with the overall economic situation
The Broad Economic Policy Guidelines for 2000 are available (scroll down to page 75 of the full text of the BEPG to find the section concerning outlining the recommendations for Ireland's economic policy guidelines for 2000)
Stability and Growth Pact, (SPG) (Regulation (1466/97) . The procedure for surveillance of budgetary positions and co-ordination of economic policies (the Stability and Growth Pact) monitors and assesses economic policies of Member States, with special emphasis on the budgetary position, and encompasses mechanisms to achieve adjustment. Member States are required by the Pact to submit annually stability or convergence programmes that present information on, inter alia, the medium-term budgetary objective and on the adjustment path towards the position of close to balance or in surplus, as well as information on other economic policy measures. The main areas where convergence or divergence appears are economic growth, cyclical performance, inflation, real interest rates, and external balances. The Council examines whether the budgetary objective provides for a safety margin to ensure the avoidance of an excessive deficit and whether the policies are consistent with the BEPG. Subsequently, the implementation of the programmes is monitored and, if necessary, the Council may, in order to prevent the occurrence of an excessive deficit, give an early warning in line with Article 99(4).
Overall, the BEPG and the SPG procedures are a form of detailed annual peer review of the economic and monetary policies of the EU Member States by the countries themselves, aided by the systematic surveillance and analysis undertaken by the European Commission. Note, that there are no mechanisms for formal sanctions against a Member State associated with failure to follow the BEPG. However, there are sanctions associated with the SPG. In the case of Ireland it was the procedure involving the BEPG which was invoked.
Economic policy coordination and the euro group
The European Commission adopted on the 7 February 2001 a Communication on the strengthening of economic policy co-ordination in the euro area. The Communication puts forward a set of concrete steps to improve the co-ordination process by reinforcing its content, increasing the effectiveness of the co-ordination instruments and enhancing transparency. As regards the content, the Commission proposes a more systematic assessment of the overall euro-area policy-mix on the basis of input from the Commission and the elaboration of a set of rules that guides the conduct of economic policies. It proposes that euro-area Member States abide by the principle of informing the Commission and the other members of the Eurogroup beforehand about important national economic policy measures and the key points of their stability programmes. More regular dialogue should take place between the Eurogroup, the European Central Bank and the Commission. A Press Release (IP/01/169) provides further details. A number of Member States, have expressed reservations to the proposals.
Also of interest is the developing role of the Euro Group, the informal grouping of those Member States who are proceeding to economic and monetary union. Under the current Presidency of Belgium (for the whole of 2001) the Euro Group is maintaining a high profile.
The case against Ireland
The Irish Finance Department received the annual assessment (IP/01/105) by the European Commission of Ireland's updated Stability Programme early in January 2001. The Commission concluded that the 2000 update was in line with the requirements of the Stability and Growth Pact but that Irish budgetary plans for 2001 were inconsistent with the 2000 Broad Economic Policy Guidelines (BEPG) adopted in 2000.
Subsequently, a draft Council Opinion was prepared which proposed issuing a Recommendation under Article 99(4) of the Treaty critical of Ireland's budgetary policies. The 'Recommendation with a view to ending the inconsistency with the broad guidelines of the economic policies in Ireland - Application of Article 99(4) of the Treaty establishing the European Community' was adopted at the Ecofin Council on 12 February 2001 (scroll down the Press Release to find the section on Ireland and the full text of the Recommendation). The key paragraphs are:
The Irish budget for 2001 is expansionary and pro-cyclical and therefore inconsistent with the Council's 2000 broad guidelines of the economic policies, which state that the Irish authorities should 'be ready, already in 2000, to use budgetary policy to ensure economic stability given the extent of overheating in the economy; gear the budget for 2001 to this objective'. The Commission estimates that restrictive measures equivalent to at least 0.5&percent; of GDP would offset the expansionary nature of the budgetary plans for 2001.
Hereby recommends:
1. To remove the inconsistency with the broad guidelines of the economic policies, engendered by the budget plans for 2001, the Irish government should take countervailing budgetary measures during the current fiscal year. Under the macroeconomic assumptions of the 2000 update in the Stability Programme, this should ensure that no reduction in the underlying budgetary surplus from 2000 takes place.
A robust defence of the Irish Government position was given by the Irish Finance Minister Charlie McCreevy in Dail Eireann on the 13 February 2001 (the speech also contains a useful and straightforward description of the EU mechanisms for economic policy coordination).
The development has evoked a considerable negative response in Ireland, which can be followed in the articles from The Irish Times and statements by Irish Finance Minister, Charlie McCreevy on the website of the Irish Finance Ministry noted below. Some commentators have even suggested that the criticism of Ireland by the EU might lead the Irish people to vote against ratification of the Treaty of Nice when a referendum is held at some point in the near future. The irony of the country with one of the most dynamic and successful economies being formally criticised by its fellow EU Member States has not been missed by many commentators. Some have even suggested that the underlying reason for the criticism is not the details of the Irish budget of December 2000, but rather the tax policies of the Irish government, which encourage foreign investment with a favourable tax regime, while also being the recipient of substantial EU structural assistance. Many of the newspaper articles listed below touch upon these issues.
Further information within European Sources Online:
European Sources Online: Topic Guide
- Economic and Monetary Union- Ireland
European Sources Online: European Voice
- 20.6.96: 'Celtic tiger' looks to the future with slight trepidation- 27.6.96: Ireland sets its sights on EMU- 12.9.96: EMU's new architect- 14.11.96: Ireland targets inflation in bid to join 'currency club'- 9.1.97: Inflation threat to Irish EMU entry- 20.2.97: Soaring punt creates headache for Dublin- 5.3.98: Warning that EMU will force cuts in high interest rates- 21.5.98: Irish get agreement on tax-cutting deal to maintain incentives for companies- 23.6.98: Ireland prepares to weather the storm of funding reform- 17.9.98: Fortune is smiling on the Irish economy- 5.11.98: Dublin contests Commission growth forecasts- 19.11.98: Shadowy group on the threshold of euro power- 3.12.98: To stay a 'winner', the objective is to be judged 'poor'- 18.2.99: Ireland booms as investment magnet- 1.2.01: Euro Group head seeks radical reforms- 18.1.01: Swedes get tough on euro-zone budgets- 15.2.01: 12 February Ecofin
Further information can be seen in these external links:
(long-term access cannot be guaranteed)
European Commission: DG Economic and Financial Affairs
- Homepage
European Commission: DG Education and Culture: SCADPLUS
- Union Policies: Economic and Monetary Union
- Union Policies: Economic and Monetary Union: Resolution of the European Council on economic policy coordination
- Union Policies: Economic and Monetary Union: Strengthening the surveillance of budgetary positions
European Parliament
- Fact Sheets: Economic and Monetary Union
Council of the European Union
- Ecofin Council Press Releases
Economic Policy Coordination
- Stabiluty and Convergence Programmes
- Ireland: Stability Programme: December 1999 update
Ireland: An Roinn Airgeadais (Department of Finance)
- Homepage
- Ireland and EMU
- Economic review and outlook 2000 , August 2000
- Budget 2001 , December 2000
- Press Release, 12.2.01: Intervention by Minister at Ecofin Council, 12.2.01
- Press Release, 13.2.01: Speech by by the Minister for Finance, Mr Charlie McCreevy, T.D
Belgian Presidency of the Eurogroup
- Homepage
- General orientation note, January 2001
Sweden: EU Presidency
- Homepage
Policy issues: Ecofin
- Ecofin Council, 12 February 2001
The Irish Times
- 18.1.01: EU attacks McCreevy on 'inflationary' Budget
- 25.1.01: Guardians of euro give best pupil a dressing down
- 25.1.01: Formal censure sought for Irish fiscal policy
- 27.1.01: Nobel economist defends McCreevy's strategy
- 29.1.01: EU divided on stance towards McCreevy
- 2.2.01: Duisenberg backs censure of Ireland
- 3.2.01: EU plays down budgetary disagreement
- 3.2.01: Diplomatic offensive reduces EU demands
- 6.2.01: EC may harden stance if reprimand dropped
- 7.2.01: Irish economic policies are EU's business too
- 8.2.01: Mood among EU members hardens against Ireland
- 13.2.01: McCreevy to defy censure despite isolation in Europe
- 13.2.01: EU finance ministers give statement frosty reception
- 13.2.01: EU criticism based on false premise - McCreevy
- 13.2.01: Pledge to 'listen' viewed as mere lip-service
- 14.2.01: Brussels plays down McCreevy's response
- 14.2.01: McCreevy defends 'right' to decide policies
- 15.2.01: Solbes will be queried on reasons for censure
- 16.2.01: Solbes rules out cut in EU funds to Ireland
- 16.2.01: Even we must play by EMU rules
FT.com
- 24.1.01: Brussels may caution Ireland on economy
- 24.1.01: Brussels demands Ireland rein in expansionary economic policies
- 25.1.01: Dublin closes ranks around finance minister
- 25.1.01: Commission to seek greater co-ordination in euro-zone
- 25.1.01: Brussels demands Ireland rein in expansionary economic policies
- 25.1.01: Ireland's warning (editorial)
- 26.1.01: Policy rules changes led to slap for Ireland
- 30.1.01: 'Inflation risk' as euro-zone expands
- 31.1.01: External influences on Irish inflation
- 31.1.01: EU members urged to toe budget line
- 5.2.01: Brussels denies Irish budget in line with EU
- 5.2.01: Ireland's misunderstood budget: The European Commission is wrong to criticise Dublin's tax and spending plans as inflationary, says Mary Harney
- 8.2.01: Brussels wants euro states to liaise more on economy
- 9.2.01: Irish inflation registers sharp fall
- 9.2.01: Euro dialogue (editorial)
- 9.2.01: Moves afoot to overhaul the eurogroup
- 11.2.01: Irish finance minister faces up to Ecofin reprimand
- 12.2.01: Brussels ire on spending policy tests Irish nerves: A defiant Charlie McCreevy explains to John Murray Brown why a star EU performer can cut taxes and spend more
- 12.2.01: EU ready to order Ireland to alter budget
- 12.2.01: Irish finance minister rejects EU reprimand
- 13.2.01: Peer pressure (editorial)
- 13.2.01: Strings attached: European monetary union is leading to growing pressure on countries to avoid big tax cuts even when their public finances are healthy
- 13.2.01: EU reprimands Ireland over 'inflationary' budget
- 14.2.01: Picking on the wrong target: EU finance ministers overreacted in reprimanding Ireland publicly for its modest relaxation of a tight fiscal policy
- 15.2.01: Frank talk from Reynders on euro group: Belgium's finance minister is first to serve 12 months as euro-zone president
For background information on Ireland see the Financial Times Country Surveys
BBC News:
- 3.12.00: Just another day in paradise?
- 3.1.01: Ireland's wages crunch
- 15.1.01: Country profile: Ireland
- 25.1.01: EC attacks Irish budget
- 2.2.01: Ireland defies EC reprimand
- 12.2.01: EU reprimands Ireland
- 12.2.01: Ireland's economic row
Further and subsequent information on the subject of this In Focus can be found by an 'Advanced Search' in European Sources Online by inserting 'Ireland' in the keyword field.
Ian Thomson
Executive Editor, European Sources Online
Compiled: 17 February 2001
At the Ecofin Council in Brussels, 12 February 2001 the Council of the European Union, continuing its cycle of annual reviews of Member States Stability or Convergence Programmes, examined the programmes of Denmark, Ireland, Greece, France, Italy, Austria and the United Kingdom. The Council adopted its opinions on these programmes as well as a Recommendation concerning Ireland.
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