European Commission warns Croke Park rejection could imperil deficit reduction

The rejection of the Croke Park agreement by unions could pose a risk to Ireland's deficit reduction plans this year, the EU has warned.

In its Spring Economic Forecast – a key economic publication that serves as the basis for economic policy – the European Commission said the Government's planned wage bill savings of 0.2 per cent "still need to be effectively implemented" after the rejection of the initial agreement by the public service unions.

Higher than expected costs involved in liquidating the Irish Bank Resolution Corporation and the payment of dividends on the government's preference shares in AIB were also cited in the report as potential risks.

As a result, the report said Ireland’s deficit will be 7.5 per cent of GDP this year, higher than the EU’s February estimate of 7.3 per cent. The deficit is expected to narrow to 4.3 per cent next year.

Ireland is obliged to reduce its budget deficit to 3 per cent of GDP by 2015.

While noting that Ireland’s unemployment rate is set to be lower than in earlier projections, it said this reflected emigration rather than any “major employment creation”.

Yesterday's Spring Economic Forecast saw the European Commission revise downwards its growth projections for the euro zone as a whole.

GDP in the euro area is expected to fall by 0.4 per cent this year, rather than by 0.3 per cent as predicted in February, with growth projected to turn positive in the second half of this year.

France is expected to enter recession by the end of the year, the report found, with negative growth of 0.1 per cent expected.

But economics and monetary affairs commissioner Olli Rehn said France may be given two years to reach its deficit-reduction target, signalling a loosening of EU policy towards deficit reduction targets. Noting that "significantly larger and front-loaded effort of fiscal consolidation would be required than is currently planned" if France was to bring the deficit below 3 per cent next year as originally planned, Mr Rehn said it "may be reasonable" to extend the deadline and correct the excessive deficit by 2015 at the latest.

Three countries – France, Spain and the Netherlands – are expected to miss the debt/GDP ratio targets set by the European Commission. Noting the “persistent deterioration of French competitiveness”, Mr Rehn said a credible medium-term fiscal strategy in France needs to be complemented with “substantial structural reforms” in the labour market, the French pension system and by opening up markets.

According to the forecast, unemployment across the euro zone is expected to peak at 12 per cent this year, with a “modest rise in employment” forecast in 2014.

Describing the unemployment situation in Spain and Greece as “unbearably high”, Mr Rehn said Europe must do whatever it takes to overcome the unemployment crisis. Structural reforms need to be pursued ever more intensively, he said, underling the need for labour reform policies.