EC warns of 'major challenges'

The European Commission has urged the Government to continue its steadfast execution of the EU-IMF bailout plan to minimise Ireland’s vulnerability to the volatile situation in the euro zone.

In a detailed assessment of the Irish economy, the EU’s executive branch said the Government has made “significant progress” in its implementation of the rescue programme but warned that major challenges remain.

The commission’s views are set out in a series of country-specific recommendations which it issued to member states today in line with newly-enacted laws to intensify Europe’s system of economic governance.

Under the bailout Ireland is already under intensive surveillance by the Commission and its “troika” partners – the European Central Bank and the IMF – so there are no new policy recommendations to the Government.

However, the Commission made it clear that “major challenges” remain to be overcome. “All the programme’s conditions have been met, and available information suggests that the policy conditions associated with future reviews are also broadly on track to be met,” it said.

“Key challenges and risks in the period ahead relate to the adverse external environment and in particular the risk of unfavourable developments in the euro area; increasing related challenges to bank deleveraging and funding; the complexity of the reorganisation of the financial sector; and possible pressure on the budget should economic activity prove weaker than anticipated.”

The Commission said the deleveraging of domestic banks exceeded bailout targets for 2011 as a whole but added that “challenging market conditions and the deteriorating quality of remaining assets for disposal” may jeopardise the achievement of future deleveraging targets.

“It is essential to further develop the financial sector strategy to underpin the viability of domestic banks, with a view to improving prospects for their timely return to market funding and, ultimately, private ownership.”

While saluting the Government’s execution of the bailout plan, the Commission said agreed reductions in public sector employment and developments in the financial sector will lead to a further contraction in overall employment this year.

“Export-driven growth is expected to pick up to 1.9 per cent in 2013 and to almost 3 per cent by 2015 on the back of Ireland’s strong demographics, flexible labour market and considerable spare capacity in the economy.

“This should lead to employment growth and fall in the unemployment rate.”

Overall, the Commission said Ireland has made “important progress” in its implementation of the bailout programme. “The fiscal deficit target for 2011 was achieved and the 2012 budget aims for a fiscal deficit in line with the programme. By 2015, Ireland plans to reach a deficit below 3 per cent of gross domestic product,” it said.

“Sheltered sectors of the economy are being opened up with the publication of several reform bills, while steps are being taken in retail sector and to strengthen competition law enforcement.

“To address youth unemployment, the Irish authorities together with the Commission examined the possible measures for reducing youth unemployment, including through reallocation of the European Structural Funds.”