Providing the momentum for growth

Comment: The rules of the Stability and Growth Pact need to be revised to stimulate investment

Let's start with the politics. From the very beginning, the single currency was a political project and it remains so today not withstanding UK Chancellor of the Exchequer Mr Gordon Brown's so-called independent economic tests.

For the finance ministers of Ecofin at the time of its inception, including Britain's Mr Ken Clark, our task was clear - we were the engineers who had to design a robust structure that would sustain a political concept.

The Maastricht criteria had already been defined. But in the autumn of 1995, Mr Theo Waigel, the German finance minister and senior figure of the Ecofin council, proposed the establishment of a stability pact.

In our informal discussions over lunch, a central part of those monthly meetings, he was quite blunt. He could not persuade the Bundestag, let alone the German people, to abandon their deutschemark without some additional safeguard to ensure the viability of the new currency.

Given the currency history of Germany, the west Germans regarded the creation of the deutschemark as a defining monument of post-war reconstruction.

In any economy it is important that fiscal and monetary policies should not work in opposing directions. In the context of economic and monetary union (EMU), there was a clear risk that, with an independent central bank charged solely with maintaining price stability, failure to effectively co-ordinate the fiscal policies of the member-states would result in higher interest rates and lower growth.

It was also important to maintain the fiscal autonomy of member-states, for political and economic reasons. A rigid adherence to excessively tight and uniform fiscal targets is not always necessary.

Member-states differ in a number of respects, including the openness of their economies and the strength of automatic fiscal stabilisers.

Hence, an approach that takes account of the circumstances of individual member-states is desirable.

The term "flexible" is not a euphemism for "soft". While lower-than-expected growth was largely responsible for the recent difficulties encountered by Germany, France and Portugal, there are other more positive circumstances in which a country can approach the 3 per cent Stability and Growth Pact deficit limit.

The Republic is a case in point. While the Irish miracle has many progenitors, including domestic policy decisions made over many years, access to European markets and EU financing for infrastructural investment have been key factors in the transformation of the Irish economy.

The Republic is an economy in transition. We need to put in place a world-class infrastructure matching our new level of prosperity. This will require major public investment.

The State already has one of the highest levels of public investment as a share of gross domestic product in the EU. This level must be increased and then sustained, perhaps for as long as a decade. Without this investment, the Irish economy cannot continue to prosper.

Much of the investment required is of a once-off nature. When the infrastructure deficit has been tackled, public investment can revert to more normal European levels.

Whereas in the 1980s and 1990s, EU funding would have borne much of this burden, it now necessarily and appropriately rests with the Irish Exchequer.

It does not make sense, however, that this investment should be entirely funded from current resources. To fund these major infrastructural projects from current taxation would place an intolerable restriction on the capacity of the Government to make much-needed improvements in public services.

Public expenditure as a share of national income is already among the lowest in Europe.

The logic of the "golden rule" should apply - that a distinction be made between current and capital spending. Since public investment increases the growth capacity of the economy, part of the cost can be safely spread over a longer period through deficit financing, without adversely affecting the sustainability of public finances. Ireland currently has the second-lowest debt-income ratio in the EU.

Britain's Mr Brown has made similar arguments in relation to public investment in human capital, such as education and training, which will also raise the economic growth rate.

The alternative, whereby Ireland would finance this capital expenditure requirement without recourse to deficits, would be socially and economically damaging.

In particular, it would introduce an even greater pro-cyclical element into Irish public finances than already exists, since periods of strong growth and revenue buoyancy would be taken as a signal to accelerate work on capital projects, while recessions would prompt cutbacks in such programmes.

This is precisely what the Government is doing, in a mistaken drive to balance its books.

The primary political objective of EMU has been achieved. It is now time to review the rules of the Stability and Growth Pact in the context of the European economy's need to stimulate investment and growth.

Lower interest rates alone will not do this and, in the case of Ireland and Britain, would be inappropriate.

The word growth was added to the pact by France in Dublin Castle in 1996 when the political deal was successfully negotiated. It is time now to give it momentum.

Ruairí Quinn TD is a former leader of the Labour Party. As minister for finance from 1994 to 1997 and chairman of Ecofin during the 1996 Irish presidency, he played a leading role in the negotiation of the Stability and Growth Pact.