Upbeat EU forecasts raise fear of political motivation

The European Commission's extremely optimistic view of how the Irish economy will perform is at odds with its views on the rest of the 15-nation European Union.

Overall, for the 11 countries that will adopt a single currency next year, it has said GDP growth this year will be 3 per cent and has cuts its forecast for next year from 3 per cent to 2.6 per cent, because of the impact of the international financial crisis.

But Ireland will grow this year at a much faster pace than expected, it says - 11.4 per cent, compared to a previous forecast of 8.7 per cent - while next year the economy is predicted to expand by a further 8.2 per cent.

EU finance commissioner Mr Yves-Thibault de Silguy said turbulence in Asian markets and the crisis in Russia had caused a slowdown in world growth and trade that had sharply cut demand for European exports.

But Government sources here said the Commission had not taken account of the same turbulence on the Irish economy and that no impact from either labour shortages or a possible falling off in foreign direct investment had been included in the calculations. It is understood the Commission simply factored in the large cuts in interest rates expected here when coming up with its optimistic forecasts. Sources also suggest that governments generally have sight of the Commission numbers before they are published and often even agree them. This time, however, the Department of Finance is understood to have disagreed vociferously with the Commission, but to no avail.

According to Mr Jim O'Leary, chief economist at Davy Stockbrokers, in the light of such optimistic forecasts it is legitimate to look at the motivation of the EU Commission.

Of all the main forecasting groups, the one most often charged with a political motivation is the European Commission. Generally the criticisms have centred around it being overly optimistic about various EU economies and how easily they would qualify under the Maastricht criteria for monetary union.

But the Commission is now setting out its stall for the future of the Common Agricultural Policy and further payments to Ireland under the structural funds. As former Taoiseach Dr Garret FitzGerald warned in Kenmare last weekend, the EU is becoming tired of handing money over to the Irish, when the economy is doing so well.

"We have irritated donors such as Germany, rivals for funds such as Spain and the European Commission itself," he warned.

And indeed EU Commissioners such as competition chief Mr Karel van Miert and regions Commissioner Ms Monika WulfMathies are thought to be reluctant to grant more concessions in areas such as tax reliefs to what they perceive as a booming Irish economy.

Strongly optimistic forecasts from the Commission would undoubtedly help its case when arguing with the Taoiseach Mr Ahern against further funding. And certainly, the contrast with the Department of Finance's figures is striking. While the Department has tended to underestimate the growth rate, the Commission's figures are also at the very top end of expectations from private sector forecasters.

The Department of Finance is officially predicting that GDP growth this year will be 8.7 per cent, while inflation will average about 2.75 per cent before falling back in 1999. At the same time, the general government debt is expected to fall to about 55.4 per cent of GDP.

The Commission is estimating that inflation will come in at 2.7 per cent this year, but will quickly rise to 3.3 per cent next year. The Commission has also significantly upwardly revised the forecasts for the Budget. It expects a surplus of revenue over spending to rise from 2.1 per cent this year to 3.4 per cent next year and a massive 4.6 per cent surplus in 2000.

At the same time it is expecting the Euro-11 as a whole to remain in deficit to the tune of 1.7 per cent by 2000. It is also predicting that debt will fall back to 44 per cent in 1999 and 34 per cent in 2000.

If these figures were indeed to prove correct, there would be an argument that we could do with a faster withdrawal from EU funding in the years ahead.