Madam, - In response to my article of September 6th, Dan O'Brien of the Economist Intelligence Unit (September 10th) warns that Ireland could face censure from the European Council for running a budget deficit that exceeds 3 per cent of GDP.
Mr. O'Brien argues that if the Commission were to report to the Council on the existence of an excessive deficit, the Council may look unfavourably on Ireland because of the "quality of public finances." Mr O'Brien is assuming that the Commission will report. However, Council Regulation 1056/2005, to which Mr O'Brien refers, authorises the Commission not to report in cases where it deems the deficit to be exceptional and temporary. That same regulation changes the definition of exceptional circumstances to include situations where the excess deficit "results from a negative annual GDP volume growth rate". Ireland's real GDP will probably contract in both 2008 and 2009.
Tightening fiscal policy severely during a recession to meet the 3 per cent guideline would further depress economic activity and would be a mistake. European governments in 2005 changed the definition of exceptional circumstances so that the rules would no longer force member-states to make that mistake. - Yours, etc,
ALAN AHEARNE,
Department of Economics,
NUI Galway.