Ireland prepares to weather the storm of funding reform

Date: 26/03/1998

By Myles Neligan

THE likely impact of the European Commission's plans for structural fund reform is difficult to assess, but there is general agreement that Ireland will be one of the countries hardest hit.

While final decisions on how to distribute the available cash between the EU's poorer regions will not be taken until full economic statistics for the period 1994 to 1996 are available, Ireland - the largest recipient of structural fund money per head in recent years - will see a sharp reduction in funding from 2000 onwards.

Since 1991, the country has benefited from transfers under the structural and cohesion funds worth 1.2 billion ecu per year, in addition to generous market support payments under the Common Agricultural Policy.

This translates into approximately 630 ecu per adult head of population, more than twice the corresponding figure for Portugal and Greece, the next largest beneficiaries on a per capita basis.

The sums involved are huge in an Irish context, equivalent to roughly 3% of annual gross domestic product.

Although the scale of these transfers is viewed with a critical eye in these days of budgetary austerity, few can deny that the money has been well spent.

"The funds came on stream at a critical time, enabling us to maintain high levels of capital and social investment while implementing a programme of budgetary austerity," explains one Irish official. "The benefits of this investment started to be felt a few years later when the economy was in an upturn, and the country just took off."

Ireland's current predicament is in many ways the consequence of its unprecedented success.

Dublin is keen to stress that structural fund money contributed only modestly to the country's phenomenal 6% average annual economic growth rate from 1990 to 1995, pointing out that the largest sums were spent on improving infrastructure.

But the simple fact is that in income terms, Ireland is no longer a poor country. According to the latest figures, Irish GDP per head stands at 98% of the Union average, well over the 75% cut-off point for the most generous funding allocations. This means that structural fund payments to Ireland will be wound down by as much as 50% between 2000 and 2006, although the precise figures will be settled during EU ministerial negotiations on the proposals over the next 18 months.

As the country's gross national product - the indicator used for cohesion fund allocations - is still below 90% of the EU average, it will continue to qualify for cohesion fund payments until 2003. However, analysts are certain that a steady rise in foreign investment receipts will push Ireland's GNP over the 90% threshold beyond this date.

The Irish government accepts that the current level of funding cannot be maintained, but warns that wielding the axe too freely may undo much of the progress achieved in recent years. "We are now relatively prosperous, but to reach a truly level footing with the wealthier EU countries we would need to maintain our current income levels for at least 15 years," says an Irish diplomat. "Our infrastructure is still light years behind that of France and Germany."

In the forthcoming negotiations, during which Ireland's CAP and structural fund payments will all be called into question, Dublin will plead for a soft landing.

There is particular concern that Ireland will lose its right under EU regional aid rules to draw in foreign direct investment by means of generous government subsidies.

Approximately 15% of the Irish workforce is employed in foreign-owned manufacturing companies attracted by government incentives. The ceiling for such subsidies is destined to fall from 70% to 10% of total start-up costs, thus depriving the Irish government of one of its main strategies for combating persistently high unemployment.

But the Irish are determined to weather the storm and maintain current levels of inward investment despite the drop in EU funding.

"With the added constraints of economic and monetary union, this means that we will have to run a budget surplus for most of the next decade and increase the participation of the private sector in investment projects," says one official.