More austerity likely if stagnation turns to slump

Thu, Mar 1, 2012, 00:00

ANALYSIS: The leaked report hints at differences of opinion within the troika on what to do if things take a turn for the worse

THE EUROPEAN Commission’s latest assessment of the Government’s compliance with the terms of the bailout was due to come into the public domain today. It leaked out yesterday. In Berlin.

Before assessing the import of the manner and source of the leak, consider first the substance of the document (bearing in mind that the draft could be altered before the final version is published).

Perhaps the biggest issue – economically and politically – is whether supplementary tax and/or spending measures will be demanded by the bailout troika this year if budget targets look like they will be missed.

The commission is not at all clear-cut on what it thinks should be done if things go awry.

Unlike its troika partner, the International Monetary Fund, it is not set against additional measures – the IMF has stated repeatedly that it believes more budgetary tightening would be self-defeating.

But nor does yesterday’s draft report echo the sounds coming from Washington. It states that “a further deterioration in the macroeconomic backdrop could require additional fiscal tightening later in the year, which could have pro-cyclical contractionary effects” .

So what position is the troika collectively likely to arrive at if things do take a turn for the worse?

Given the European Central Bank’s eternally hawkish position on matters fiscal and the IMF’s dovishness, the commission again seems to be somewhere in the middle. But European solidarity usually ends up causing a closing of ranks between Brussels and Frankfurt. The likelihood is, therefore, that more austerity will be demanded if stagnation turns to slump.

If the commission’s position on what to do about missed budget targets is ambiguous, it is somewhat clearer on Minister for Social Protection Joan Burton’s plan to shake up the way the State provides services to the jobless.

In a thinly veiled criticism of Pathways to Work, which was published last week after many delays and is designed to improve assistance to those receiving unemployment benefits, the report states that “despite recent steps in the right direction, labour market activation policy in Ireland remains weak both in relation to European standards and in relation to the challenge presented by the large number of long-term unemployed”.

On downsizing the banking system, the commission notes that targets were exceeded in 2011, but raises concerns that targets for 2012 may not be met. This risk arises from the concern that other European banks will flood the market for assets similar to those which dominate Irish banks’ balance sheets as they too seek to deleverage.

Though this is a very real danger, the report appears to reflect the more fragile situation in January, when its team were in Dublin. Since then, tensions have eased considerably owing to the ECB’s provision of two massive tranches of three-year financing to the wider European banking system. This has reduced the risk of Irish banks missing deleveraging targets and/or raising the cost for taxpayers of bailing out the banks.

And what of yet another leak in Berlin? Irish irritation is more warranted on this occasion than when budget 2012 information found its way to the German parliament in December. In that case it merely highlighted the lack of transparency in the Irish budgeting process. If the Oireachtas had the powers of the average European parliament, the information would have long been in the public domain here.

In this instance, the report was a draft sent by the commission to other finance ministries. If every finance ministry passed on all draft commission documents to parliaments, nothing could happen on a confidential basis. Trust among the states of Europe would be in an even more tattered state than it already is.

The German government is obliged to inform parliament in a timely manner on fiscal matters, but some executive prerogative always exists on matters affecting diplomatic relations. In the interests of smoothing relations it might usefully have exercised it on this occasion.

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