Eurozone Among the limitations facing the Minister for Finance, Mr McCreevy, as he drew up yesterday's Budget was the requirement under the EU's Stability and Growth Pact to maintain a Budget deficit below 3 per cent of gross domestic product (GDP).
Unlike his French and German counterparts, who last month escaped censure for serial breaches of the pact's rules, Mr McCreevy is determined to remain within the limits imposed on euro-zone countries.
The Minister has made clear, however, that he favours a more flexible interpretation of the rules that would allow the Government to borrow more for infrastructure funding.
Last month's decision by the European Commission not to enforce the rules in the case of France and Germany has effectively killed off the pact as a coercive instrument and prompted EU governments to consider a change in the rules.
The EU Commissioner for Economic and Monetary Affairs, Mr Pedro Solbes, told the European Parliament on Tuesday that EU finance ministers would start discussing a reform of the pact in the near future.
"We have to establish whether the procedures, while respecting the treaty, are the most appropriate ones, and that's what we will be debating in the near future," he said.
In this context, "the near future" means early next year, when the Republic assumes the EU Presidency, leaving Mr McCreevy with the task of setting the debate in motion. The task will be difficult, as Mr McCreevy discovered earlier this year when the European Commission proposed changes that would allow countries with low public debt to run higher deficits.
As soon as the proposal was tabled, countries with high public debt demanded the same latitude, prompting the Commission to withdraw the plan. Any fresh reform of the pact is likely to take months to negotiate, probably stretching well into the Dutch Presidency, which follows the Republic's.
There are several ways the pact could be reformed so that the rules would be more compatible with economic reality in the euro zone. The simplest option, raising the 3 per cent budget deficit threshold, is unlikely to find favour, not least because it could alarm financial markets.
Another proposal would calculate the budget deficit over an entire economic cycle, allowing countries to borrow more in lean years as long as they run a tighter ship when things get better.
Some countries would like to maintain the 3 per cent limit but to exclude certain forms of expenditure from its calculation. France, for example, wants to exclude defence expenditure, while Italy would like infrastructure spending to be exempt. The problem here is that it is often difficult to define the nature of expenditure or to agree rules that would ensure that only legitimate exemptions would be tolerated.
Mr McCreevy agrees with the Commission that the level of public debt should be taken into account in allowing extra latitude to euro-zone governments. His own problems would be alleviated if Eurostat, the EU statistics agency, did not insist on including the entire cost of multi-annual infrastructure projects in a single year's expenditure.
After last month's events, the most difficult element of any reform could be ensuring that the pact's rules are enforceable. At last weekend's meeting in Naples of EU foreign ministers, the Netherlands called for changes to the pact that would bar any member-state that runs an excessive deficit from voting on disciplinary action against another member-state.
The Dutch also want the Commission to be allowed to initiate disciplinary action that could only be prevented by a qualified majority in the Council of Ministers.
EU finance ministers differ on how best to reform the pact, but most acknowledge that something must be done if the EU is to have effective, enforceable budget rules that make economic and political sense.
