Commission to extend budget policy guidelines

The European Commission is to step up its scrutiny of budgetary polices in all member states. The guidelines - at the centre of the Republic's dispute with the Commission over budgetary policy - currently cover broad economic matters such as the level of the Exchequer surplus. But due to pressure from other member-states, they are likely to be extended to areas such as labour and product markets.

Each EU state will be signing up to new broad economic policy guidelines in June. Negotiations on the precise terms have just begun and, in the case of the Republic, this process will continue in tandem with scrutiny by the Commission of last year's Budget in line with the terms of the censure recommendation agreed by EU finance ministers last week.

Until now, the existing budgetary guidelines have not been taken seriously by many states. However, after last week's public disagreements with Mr McCreevy and the British Chancellor of the Exchequer, Mr Gordon Brown, it is likely that far more attention will be paid to the detail of what is agreed in the future.

The Commission will be publishing an overall evaluation of adherence to the guidelines across the EU at the end of the month. That document will form the basis of the broad areas that next year's guidelines will cover. Following bilateral discussions, the Commission will then come up with a proposed text of next year's guidelines by the end of April. After discussion at the Economic and Financial Committee - made up of senior Department of Finance and Treasury officials from around Europe - and between finance ministers, the guidelines will be agreed in June, ready to be signed off by heads of state.

There is no mechanism for an individual state simply to disagree with the guidelines and refuse to implement them, although the inclusion of labour or product market guidelines may be resisted by some. In the Republic's case, labour market could mean changes to social insurance contributions.

A compromise will have to be found at the end of the day, Commission sources suggest.

The Tanaiste, Ms Harney, strongly underlined the Government's commitment this week to the so-called peer review and multi-lateral surveillance.

The Commission takes a narrow view of the guidelines. This year, for example, it was agreed that the Budget would be neutral on a cyclically adjusted basis. That really meant that the Exchequer surplus had to stay the same. To begin with, the Commission wanted Mr McCreevy to take 0.7 per cent of gross domestic product (GDP) out of the economy, or around £600 million (€762 million). That was amended subsequently to 0.5 per cent of GDP, or around £400 million.

Arguing about £400 million in a Budget that came to around £2.5 billion appears pedantic. But the Commission is insistent that members of the club must obey all the rules. Taking Ireland to task also sends a clear marker to larger states such as Italy with which the Commission has far bigger economic problems and to the potential member-states.

However, it does not differentiate between capital and current expenditure. On his visit here this week, European Commissioner Mr Pedro Solbes was brought by car to Loughrea on a particularly foggy day. The state of the roads could not have escaped his attention. But the Commission still believes that, if additional money is to be spent on capital projects, less must be spent on current. There are also questions in Europe about where previous tranches of structural funds have gone, given the still appalling state of some of the main routes.

The Commission also believes that strict adherence to the broad economic guidelines is essential for the euro's well-being. The Republic may account for only 1 per cent of GDP but it is still a member of the club. In the short term, arguing about the size of a surplus, whether in Ireland or in the larger member-states, ought not to affect inflation or, by implication, interest rates. But over the medium and long term, both the Commission and the European Central Bank believe that broad adherence is crucial.