THE GOVERNMENT must change the way it handles the public finances and accept greater EU surveillance of its policies in order for Ireland to be a successful member of the euro zone, a new report by the National Economic and Social Council (Nesc) claims.
In The Euro: An Irish Perspective, the council warns that the future stability of the euro zone “depends on more effective surveillance and co-ordination” of the financial health of EU members.
The council favours a greater sharing of information between EU members as part of an “economic government” for Europe.
Mandatory surveillance of economic policies and penalties for not adhering to joint fiscal policies could be part of the new regime, it suggests.
It also calls for stronger EU-wide regulation of financial services in order to prevent “irresponsible” banking practices “which threaten the prosperity of the euro area”.
The report states that Ireland’s approach to fiscal policy, prices, costs and financial regulation were “not sufficiently adapted to the disciplines of the single currency”.
However, membership of the euro has been beneficial to Ireland, and if Ireland had not joined the single currency it is likely that the economy would have fared worse over the past two years.
Greater “popular identification” with the euro and the responsibilities that come with membership of the euro zone would enhance the effectiveness of the single currency.
“This requires a greater shared understanding of how the euro can support the pursuit of stabilisation, employment and sustainable prosperity,” the council says.
Nesc states that future fiscal policy must be counter-cyclical, an approach whereby governments save during times of high tax revenues and spend in order to stimulate the economy during recessions.
Between 2000 and 2007, the Government favoured what are known as pro-cyclical economic policies, whereby money gleaned from bumper tax years was spent, meaning there was little cushion to protect public finances when tax receipts went into decline.
“The severity of the current crisis should make us absolutely determined to learn the correct lessons,” the report states. In particular, Ireland needs to make “an unambiguous reaffirmation” of its commitment to low debt.
“High indebtedness brings a severe reduction in national sovereignty, as domestic options are increasingly in the hands of international markets and ratings agencies,” the report states. Fiscal policies must be “counter-cyclical, sustainable and respect the EU Stability and Growth Pact”, it adds.
During the recent economic crisis, EU members including Ireland swiftly abandoned deficit targets set by the EU under the Stability and Growth Pact, as such targets became unachievable.
The council accepts that any reform process would involve “high-level bargaining” between heads of government and the EU institutions, but it adds that Ireland has “a strong interest in the success of this process”.
The council concludes that the euro faces “severe” challenges in the future. These include the recovery of the European economy, the continuing risks to the financial system and assessing the effectiveness of the €110 billion in financial support provided to Greece earlier this year by euro-zone governments and the International Monetary Fund (IMF).
Nesc, which advises and reports to the Taoiseach on economic strategy, also highlighted the need for price and cost-control to maintain Ireland’s competitiveness.
The council is chaired by Dermot McCarthy, the secretary general of the Department of the Taoiseach, and comprises representatives of trade unions, employer groups, voluntary organisations and others.
