DEADLINE:THE EUROPEAN Commission agreed to extend by one year until 2015 Ireland's deadline to achieve a 3 per cent budget deficit because it felt the projections in the Government's four-year were "on the high side", senior sources in the EU executive have said.
Economics commissioner Olli Rehn downgraded his Irish growth forecasts to take account of looming measures to extract €6 billion from the 2011 budget, saying the economy would expand by 0.9 per cent next year and by 1.9 per cent in 2012.
This contrasts with the forecast in the four-year plan that the economy will grow by 1.75 per cent in 2011 and by 3.25 per cent in 2012. It also marks a deterioration in Mr Rehn’s own assessment as he projected 3 per cent growth in 2011 in his spring forecast.
A senior commission source said its negotiating partners in the bailout troika – the European Central Bank and the IMF – each shared the assessment that the forecasts in the four-year plan were too optimistic.
This reflects the impact of additional interest payments on loans to recapitalise the banks and a more conservative estimate on the likely growth in exports.
“After very intense discussions it turned out that, certainly from the troika point of view, these forecasts were on the high side,” the source said. “Given the strong fiscal consolidation to be undertaken in Ireland next year and following that, according to that view, the growth would be significantly lower than expected by the Irish Government.
“Indeed, if you take that through the period of the [bailout] programme, it turns out that, if a more sanguine or less optimistic view of growth is undertaken, then indeed the deficit will not fall below 3 per cent in 2014.”
However, Mr Rehn insisted to reporters the “only way” for vulnerable countries to exit the financial crisis was to “restore confidence by intensified fiscal consolidation”. Such countries must also undertake substantial structural reforms.
The extension to the deadline was endorsed by EU finance ministers when they signed off on Ireland’s bailout. Irish officials said the 2011 budget, when published on December 7th, would set out revised forecasts taking into account tax returns for November and the terms of the rescue plan.
Mr Rehn was speaking as he forecast growth in the euro area would slow to 1.5 per cent in 2011, from 1.7 per cent this year, but recover to 1.8 per cent in 2012.
Germany will continue to be the main growth engine, but the rate of expansion in its economy is likely to slow to 2.2 per cent next year from the 3.7 per cent seen this year.
“With private domestic demand as a whole strengthening, the recovery is said to be increasingly self-sustaining over the forecast horizon,” Mr Rehn said.
While encouraged that European employment would improve next year, the recovery was “uneven”.
His Irish forecast suggests the Irish unemployment rate will drop to 12.7 per cent by 2012 from 13.7 per cent year this year, with government debt rising to 107 per cent of gross domestic product next year and 114.3 per cent in 2012 from 97.4 per cent in 2010. The equivalent sum in 2007 was 25 per cent.
“There is a certain dualism in Europe, with Germany having rebounded very forcefully from the financial crisis and economic recession, with a strong growth of exports and increasingly spilling over to domestic demand,” Mr Rehn said.
“This is the phenomenon of some other central and northern European states as well. Meanwhile, mainly because of challenges related to the fiscal consolidation, some countries in southern Europe and Ireland have faced significant difficulties.”
However, Mr Rehn said the “real Irish economy” had not gone away. “It has major strengths such as a skilful labour force, and I know that it will bounce back. Ireland’s export performance is strong and recovering.
“Ireland had the biggest rise in industrial production in the EU in September . . . I’m certain that the Irish are smart and resilient and stubborn people, and they will certainly overcome this current challenge, and the EU supports Ireland in this formidable challenge.”
