Diplomatic offensive succeeds in reducing weight of EU demands

The European Commission's criticism of the Republic has provoked intense private negotiations as the Commission and, specifically, the Spanish commissioner for economic affairs, Mr Pedro Solbes, target what they regard as this State's excessive budgetary spending.

As far back as January 11th, the economic and financial committee - made up of the most senior treasury officials, central bank representatives and Commission personnel - were warned that the Commission intended invoking an unprecedented recommendation to the Republic. This duly happened on Wednesday, January 24th, when Mr Solbes brought a very tough set of recommendations to the full Commission for approval, before sending it on to EU finance ministers and their representatives.

Irish EU Commissioner Mr David Byrne was in a difficult position. He had to seek to tone down the criticism but would bear collective responsibility for whatever came out of the meeting.

After almost a week of tough negotiations and behind the scenes manoeuvring, Mr Byrne succeeded in having some of the most severe criticism and, crucially, demands for remedial action removed from the recommendations. But the discussions were protracted - stretching for up to three hours.

Mr Solbes's document had talked about taking 0.5 per cent of GDP or £400 million (€508 million) in tax cuts out of this year's Budget. It also talked about cuts in both current and capital expenditure and demanded that corrective action be taken by the middle of the year.

By the time the Commission finally signed off on the document most of this had disappeared. Now the Commission was asking the Government to take "as soon as possible and in any event during the current fiscal year, restrictive budgetary measures". The latter was crucial in that the current fiscal year includes the next Budget in September or October and leaves the Government with considerable room for manoeuvre.

All mention of the 0.5 per cent of GDP cut had disappeared from the recommendations and merely made up some of the preamble. In this form, as one source put it, it is "almost irrelevant". "It is just words on paper and not anything which has to be acted upon."

The recommendation still outlined various corrective measures open to the Government while conceding that the Government had the exclusive authority to decide on the specifics. The British for one could not live without the reference to "exclusive authority". But the text went on to point at restraining growth in current expenditure, phasing and creating priority capital expenditure projects, or offsetting or postponing tax reductions.

It also called for any additional revenues, which in recent years have been substantial, to be used to improve the surplus, which in effect means paying off the national debt.

Finally it recommended that the Commission would report regularly on economic and budgetary developments in the Republic in 2001 and the Council would assess consistency with broad economic policy guidelines.

This was a far better result than could have been hoped for by Mr Byrne and took much of the pressure off the Government.

This formula was then considered at the next meeting of the Economic and Financial Committee last Wednesday. Mr Donal MacNally, second secretary at the Department of Finance, and Mr George Reynolds, assistant director general at the Central Bank, were the Irish representatives. The committee was discussing not just the Republic, but Italy, France, the UK, Greece and Denmark. The Irish case did not even account for most of the meeting but further substantial watering down of the recommendations was achieved. The resulting new formula of words is the one which will go to finance ministers when they meet on Monday February 12th.

The amendments made on Wednesday followed advance negotiations between the Department of Finance and the Commission. Comments at the World Economic Forum in Davos by Nobel award winning economist, Prof Robert Mundell, in which he supported the Republic, were of great benefit. The so-called "spiritual father" of the euro and importantly a former European Commission adviser strongly criticised the economic criteria behind the Commission's censure, pointing out that tax cuts were appropriate when a country was running a surplus. He had even hinted at a hidden agenda where the censure was more to do with tax harmonisation than making an economic example of the Republic. The Irish tactics worked and once again the document was substantially watered down.

The committee agreed to totally omit the element of the recommendation pointing at the various options which the Government could consider. It also changed the wording and the demand of the timing of the action. The reference to restrictive measures changed to countervailing measures and the reference to "as soon as possible" was amended to during the current fiscal year. This was absolutely key. The way was now open for the Minister for Finance and the Taoiseach to insist they would not change last December's Budget - such a move was no longer being demanded of them.

The one reference which remained unaltered was that "under the macroeconomic assumption of the 2000 update in the Stability Programme, this should ensure that no deterioration in the underlying budgetary position from 2000 takes place".

This can be read in a couple of ways. The budgetary surplus of revenue over spending in 2000 was 4.7 per cent of Gross Domestic Product and it is due to fall to 4.3 per cent in 2001. This would mean that either tax cuts or spending increases would have to be forgone in order to meet the European demands. But in reality the Government is likely to be able to achieve a surplus of around 4.7 per cent without changing any policy - all it needs is to have underestimated tax revenues by around £500 million. Going on past performance that may not be difficult.

All in all Mr McCreevy is in a much better position going into the meeting of finance ministers which will ultimately decide on the issue on February 12th than he could possibly have hoped just a week ago. There is obviously still a willingness in Europe to negotiate with the Republic. But as a Department of Finance official pointed out this week, the damage to the Republic's reputation has already been done. The Commission can afford to be generous given the publicity its rebuke has already attracted in the international press.