Irish budget deficit could be highest in EU by 2010


IRELAND’S ECONOMY will contract faster than most EU economies this year and its budget deficit will be the highest in Europe in 2010, according to new forecasts published by the European Commission.

Brussels predicts Irish economic output will fall 5 per cent in 2009, unemployment will rise to 9.7 per cent and the deficit will reach 13 per cent of gross domestic product (GDP) by 2010 in the face of the world’s worst recession since the second World War.

“The Irish economy is particularly exposed to the global economic downturn and the financial crisis given the importance to it of foreign trade and financial services,” said the commission in economic forecasts showing Ireland suffering more than almost every other EU state.

Only the Latvian economy – where gross domestic product (GDP) is expected to fall by 6.9 per cent in 2009 – will contract more than the Irish economy this year. The two other Baltic states, Lithuania and Estonia, will see output fall by 4 per cent and 4.7 per cent respectively in 2009, while Slovakia is the best EU performer with 2.7 per cent growth.

The economy of the 16 countries sharing the euro is forecast to shrink 1.9 per cent in 2009, sharply down from a November estimate for growth of 0.1 per cent. This would mark the first time the euro zone economy has contracted since the euro was launched a decade ago.

EU commissioner Joaquín Almunia warned yesterday EU states needed to commit to reverse the deterioration of public finances as soon as there was a return to normal times to ensure medium-term financial stability.

He made the comments as economists begin to question the stability of the single currency in the face of mounting economic problems in euro zone states such as Ireland, Spain, Greece and Portugal.

Spain yesterday became the second euro zone country in less than a week to have its credit rating cut by Standard Poor’s (SP), stoking fears of more downgrades in the recession-hit currency bloc as public finances decay. Following its relegation of Greece’s sovereign rating last Wednesday, SP said Spanish government policy looked insufficient to prevent years of weak growth and a ballooning budget deficit.

The cut in Spain’s rating to AA+ from AAA, a level Spain had held since late 2004, sent the euro to a session low against the dollar as investors feared Portugal and Ireland would suffer the same fate after receiving SP warnings.

But Mr Almunia said there was no threat to the euro and played down the risk of any euro zone country defaulting on its debt. “I don’t think at all the risk of default is important. Risk of default . . . always exists in the private and public sectors, but in the case of euro area members I don’t think the risks are high or are significant,” he said.

Asked about last week’s rumours sparked by an incorrect report by RTÉ that Ireland may need to be bailed out by the International Monetary Fund (IMF) he replied: “I fully endorse the denial from the Irish Government. I don’t think it is a risk at all.”

Nevertheless, the commission is clearly anxious that the Government get its ballooning budget deficit under control. The issue was raised at a bilateral meeting between Mr Almunia and Minister for Finance Brian Lenihan in Brussels shortly after the publication of the commission’s interim economic forecasts.

A Government spokesman later said the Government’s recovery programme would cut the deficit to 9 per cent of GDP by 2010.

Without any policy changes, the commission is forecasting the budget deficit to reach 11 per cent in 2009 and 13 per cent in 2013 – ahead of the Government’s forecast of 10.5 per cent in 2009 and 11.5 per cent in 2010. “The marked deterioration in the public finances in 2008 is due to a significant tax undershoot, reflecting not only the correction in the property market but also the wider recession,” said the forecast.

The commission expects a “very rapid rise in Government debt, to above 60 per cent of GDP by 2010”. – (Additional reporting: Reuters)