OPINION:Despite strong warnings, the Government massively breached euro zone budget rules. Now the EU Commission wants to censure Ireland, and Ireland should be glad of it, writes DAN O'BRIEN
THE GOVERNMENT and its advisers apparently expected the EU Commission to ignore its breach of budget rules by invoking the "exceptional circumstances" clause in the (revised) Stability and Growth Pact. They miscalculated badly.
The frightening collapse of the public finances was entirely foreseeable. It was therefore avoidable.
For the commission to have invoked the clause would not only have been to exonerate the Government for a disaster entirely of its own making, it would have removed one of the few sources of pressure that can make the Government recover its fiscal senses.
Budget 2009 amply demonstrates that the Government has yet to internalise the scale of the crisis. The assumptions upon which it is based were the triumph of irrational hope over plausible expectation.
Nothing illustrates better the unreality of the Budget than the absence of a contingency sum to cover spending overruns and/or revenue shortfalls.
Normally, the greater the risks to budget forecasts, the larger the contingency should be. With unprecedented risk domestically and internationally, a very large contingency allocation would have been appropriate. Astonishingly, no contingency sum was set aside in Budget 2009.
As a result of mismanagement, Ireland next year will almost certainly register the largest budget deficit of any euro zone country since the currency was launched a decade ago (this comes on top of the 2007-08 collapse, for which there are only two parallels over the past quarter century across the entire 30-member Organisation for Economic Co-operation and Development)
We at the Economist Intelligence Unit forecast a general government deficit of 8.5 per cent of GDP in 2009. Using less conservative assumptions, the imbalance could very easily reach double digits.
If the Government is obliged to recapitalise the banks and if yield spreads on its bonds continue to widen, the fiscal outlook will become even more alarming.
Neither the commission nor a majority of other euro zone member states will allow their shared budget rules, and ultimately their common currency, to be undermined by the recklessness of one member state. This will become clear in the months ahead.
Next February, the commission will report to the member states on Ireland's current fiscal position. That report will not be kind.
The commission's assessment of the Government's handling of its finances, contained in its 2007 report The Public Finances in EMU, placed Ireland last among the 18 countries it examined.
Worse still, it found not a single measure in place to protect the public finances in the event of an economic shock (and this despite the warning lights that had been flashing about the property market since at least 2005).
The other euro member states will not take this well. All governments have endured political pain in their efforts to respect the rules. Even now, under extraordinary circumstances, that is still the case.
Twelve of the 15 countries should remain under the 3 per cent of GDP deficit threshold in 2009. Only two - France and Greece - look certain to exceed it, and they will do so by a relatively small amount.
Given other countries' efforts and Ireland's limited goodwill in Europe - owing to the rejection of the Lisbon Treaty and perceived unilateralism in halting the recent liquidity crisis in the banking system - there is no reason to believe that Ireland will be treated with kid gloves by its partners. On the contrary, the expectation should be that they will demand that the Government make real efforts to restore order to the public finances.
This should be welcomed.
Input from the commission and others is clearly needed given the failure of the Government and those who advise it to understand the magnitude of the problem and formulate an appropriate response.
• Dan O'Brien is a senior editor at the Economist Intelligence Unit