According to Mr McCreevy, sovereign states have the right to determine their own budgetary policies without external interference. He's dead right, of course. Just as sovereign states have the right to decide their own monetary and exchange rate policies. That is, until they give that right away.
We in Ireland gave away our right to an independent monetary and exchange rate policy when we signed up for European Economic and Monetary Union (EMU). By doing so, we also agreed to abridge our right to conduct an independent budgetary policy. This is most explicit in the Stability and Growth Pact, which outlaws budget deficits in excess of 3 per cent of GDP and which, incidentally, was brokered by an Irish finance minister.
It is also explicit in the arrangements for multilateral surveillance of budgetary policies provided for under the Maastricht Treaty.
Individual member-states' budgetary policies are a matter of common concern in a monetary union. The reasons are obvious. Such policies have the potential to cause damage to others because of spillover effects in the form of consequential interest rate and exchange rate movements.
In fact, such spillover effects can occur outside a monetary union. The consequences of the expansionary policies pursued by Germany in the aftermath of reunification are a case in point.
When this proposition is applied to Ireland, it prompts a predictable objection. Ireland, accounting for just 1 per cent of euro-zone GDP, is far too small for its budgetary policies to have any effect on economic activity in the rest of the zone. This is true, of course. But it misses the point.
The point is that the locus of budgetary policy in EMU is the member-state. The fact that Ireland accounts for a trivial proportion of GDP in the euro zone does not diminish its status in this regard, in the same way as it doesn't diminish its representation at ECOFIN or on the ECB Council. It follows that Ireland is quite properly subject to the same set of rules and procedures as other member-states.
By the same token, claims that the Irish economy is "different" from the economies of other member-states should not earn it a derogation from the common set of rules and procedures either. In any event, no two member-state economies are quite the same, and there are more than a few with which Ireland shares its key characteristics of smallness and openness: Austria, Belgium, Finland, Holland and Portugal.
So, rules are rules. Application of the rules is a different matter, though. Applying the EU's rules on budgetary matters is at least as much a matter of diplomacy as it is of economic analysis. Accordingly, one would have thought that a diplomatic solution to the Irish problem might have been found, a solution that would have left Ireland to design a budget broadly along the lines of last December's offering, but that would also have assuaged the European Commission's fears that such a budget would set a dangerous precedent for others.
The route to such a solution might have taken the form of Mr McCreevy persuading his peers and the Commission that the current circumstances of the Irish economy and public finances were such that they were most unlikely to be replicated in any other member-state in the foreseeable future.
Why was a diplomatic solution not found? We can only speculate about this. It does seem as though the principals on the Irish side did not engage meaningfully in the process, a process that extends back some time and includes the discussions that led to the adoption of the Broad Economic Policy Guidelines last summer.
Perhaps, Ireland did not take the whole process seriously. There is, after all, a time-honoured tradition in this state of treating the rules and procedures that we legislate for ourselves as obstacles to be ignored or circumnavigated at will, and of regarding those who do so with greatest skill as objects of admiration. Fat chance therefore that we'll bow the knee to rules designed by others. Small wonder that Mr McCreevy's defiance is going down a treat with the electorate.
From the European Commission's perspective, the most dangerous precedent that Ireland can set is not by pursuing an inappropriately expansionary budgetary policy, but by breaking the rules and ignoring procedures. Already, the spat with Ireland has cost the process of multilateral surveillance dear in terms of lost credibility. For one thing, a member-state is seen to have ignored policy guidelines. For another, the Commission and the Council of Ministers are seen to be without a means of effectively punishing the miscreant.
One is compelled to the conclusion that to prevent wider damage, those who wish to strengthen EMU must move to institute a more forceful and intrusive system of monitoring and co-ordinating budgetary policies, together with a set of punitive deterrents for non-conforming members. Such arrangements will further abridge member-states' sovereignty, and will no doubt be widely resisted. But they will also represent the logical consequence of EMU and another milestone on the road to political union.
Roll on, the Nice Referendum.
Jim O'Leary is chief economist with Davy Stockbrokers
