The Minister for Finance, Mr McCreevy, is facing his toughest political challenge in Brussels today. The European Commission is asking EU finance ministers to issue a recommendation to the Government to tighten Budgetary policy so as to fight inflation. The ministers look set to approve this recommendation unanimously, even though Irish inflation is no longer the highest in the euro zone and the measures proposed would be unlikely to have much impact in curbing price rises.
The Commission believes that the 2001 Budget is pumping too much money into the economy and is in direct contravention of the economic guidelines agreed by Mr McCreevy. The latest version of the recommendation does not specify how this should be remedied but will imply that any additional tax revenues this year should go towards increasing the Exchequer surplus rather than additional spending.
Mr McCreevy has made it clear that he will not change December's Budget. The big question is what the conflict will mean for the 2002 Budget, which Mr McCreevy may announce in October. The recommendation will make it very difficult for the Minister to introduce another generous Budget for to do so would risk putting even more strain on our relationship with Europe.
For its part, the Commission should consider whether it has been wise to reprimand Ireland. Figures released on Friday suggest that Dutch inflation is higher than our's while Irish inflation is expected to fall this year. But the Commission argues that, if Ireland is allowed to flout agreed Budgetary guidelines, Brussels will be unable to prevent other euro zone states doing the same in the future. If Germany for instance - with one third of the GDP of the euro zone - were to formulate economic policy in defiance of its partners, the consequences for the euro could be disastrous.
The censure comes in the aftermath of the Nice Summit when the Taoiseach, Mr Ahern, fought hard alongside the British prime minister, Mr Blair, to maintain national sovereignty in deciding taxation policy. There must also be a suspicion that the success of the International Financial Services Centre and general dislike of our low corporate tax regime in some of the bigger EU capitals, has been a factor in the heavy handed tactics adopted by some of our partners. But, despite the likelihood that the censure will be approved, there is little concrete action that the Commission can take. There has been some talk in Brussels of requiring all finance ministers to present key points in their budgets to their peers before they are even announced to national legislators. This multilateral surveillance of budgetary policies looks set to become an increasing part of the monetary union. The current impasse only serves to underline how difficult this may be to implement. It also goes far beyond the economic co-ordination agreed under the Maastricht Treaty. It is likely that Ireland would have the support of a number of other countries in opposing it.
However, regardless of the wisdom of today's recommendation, the Government cannot ignore the views of our European partners. Membership of Economic and Monetary Union has made economic policy a common concern of all euro zone members. It is to be hoped that, after today, all sides can approach the debate in the future with a greater measure of openness and mutual understanding.