Tuesday, 13 February 2001

Irish recipe

The Times of Malta

The headlines of European press reports on 13th February read

Prodi urges fundamental debate on future of the EU Romano Prodi, the European Commission president, urged a fundamental appraisal of the purpose of the European Union, going well beyond the agenda for the next four years agreed by EU leaders at December's Nice summit. ` "Are we all clear that we want to build something that can aspire to be a world power` In other words, not just a trading bloc but a political entity," Mr Prodi said.

"Do we realise that our nation-states, taken individually, would find it far more difficult to assert their existence and their identity on the world stage`"

He cautioned against the temptation to hide behind "fuzzy undertakings and conflicting hidden agendas".

Mr Prodi urged a "no holds barred" constitutional debate on the fundamental nature of the Union, which would look at several central questions, including how best to co-operate on internal and external security and to what extent the EU should seek to enforce its basic values.

Stanley Crossick, chairman of Brussels-based think-tank the European Policy Centre said Mr Prodi was anxious to avert a repeat of the laborious process leading up to the Nice deal. "Nice was clearly not a comprehensive review of how the EU works, although the heads of government claimed it was. Mr Prodi disagreed with the progress made at Nice but chose not to voice this disagreement. Now he is showing his overall position, which is integrationist and aims to minimise the role of inter-governmentalism."

This is a clear reply for whoever thinks that Nice has laid a foundation solid enough to take on EU enlargement which could happen in 2003. This is neigh impossible.` And not only because an Irish referendum on the Nice Treaty risks re-opening the tortuous Nice negotiations.

Why are the Irish being so pig-headed` Have we not heard that Ireland is the model for all that`s good in the EU` Why are the Irish feeling irked by Brussels interventionism. Ireland is the first country to whom the EU book is being thrown regarding operation of their fiscal policy in the context of their membership in the European Monetary Union (EMU).

Some background is needed to understand why the Irish feel offended and short changed. Twenty years after joining the EU in 1973 Ireland was still struggling with low growth, high unemployment and a shaky currency. Following the substantial devaluation of the Irish Punt in 1993 the Irish Government reached a social contract with the trade unions.` In return for accepting the devaluation without seeking compensatory wage increases and in return for moderating wage demands the Irish Government pledged to reduce taxation to protect the average living standards. The recipe worked liked magic. Irish international competitiveness attracted a deluge of (mostly American) foreign direct investment in financial services and the technology` sectors.

Economic growth well in excess of the EU average meant that the government could finance tax reductions whilst turning a 7% budget deficit into a 5% budget surplus in the space of 7 years.

With the economy showing signs of overheating the Government has proposed a further tax-cutting budget for 2001.` `Brussels interpreted this as a pro-cyclical fiscal policy which compromises the Stability and Growth Pact (SGP)of the Monetary Union. In reality this SGP was meant to discipline countries that run budget deficits exceeding the 3% of GDP target and taking advantage of low interest rates generated by the single country. The book is being thrown at Ireland for being too successful not for being deceitful.

The argument runs like this. If Ireland were not in the monetary union the Irish Punt would harden against the Euro as Ireland would have to increase domestic interest rates to cool its economy and the economic growth above average would also help to strengthen its currency. Once this is no longer possible as Ireland is part of the monetary union, it has to take other measures to control its growth and bring it in step with the monetary union partners. Tax cuts goes against this need and therefore the partners feel they have a right to dictate Ireland`s fiscal policy. Which highlights the realism that a country cannot operate an autonomous fiscal policy once it has agreed to pool its monetary sovereignty.

What Euro countries are saying to Ireland is to scrap its highly successful social pact with the Unions so that the Irish Unions can demand high wage increases which in itself would render the country less competitive and reduce its rate of economic growth in line with the Euro average.

The lesson from this comes in two parts. Firstly is that once a country pools its` sovereignty it cannot expect to keep its neutrality, its defence and its foreign policy. One can understand why one is hearing the argument that our neutrality is an expired concept.

Whilst I do not agree that anyone outside parliament can give his own interpretation to the Constitution to accept or refuse work on the basis of` personal interpretations, it is not quite the same as saying that the government has any unilateral right to ignore the neutrality provisions of the constitution. It means that if in the La Salle case the Opposition has declared it will act prudently nobody else has a license to act imprudently;` if not to go to the Constitutional Court for a ruling, which is hardly the right thing to do at this delicate stage where Drydocks need work to reduce its claim for permanent state subsidies.

The second lesson is that` the Irish recipe is a model for the economic strategy` which` our country needs to get us out of this economic rut. We need a social pact to render this country again internationally competitive against a pledge to reduce taxes to stimulate economic growth. The Irish are finding that the EU is stopping them in their tracks because they have been so successful. We should be focussing on this rather than on the mad-rush` to increase taxes to achieve early EU accession which will prove as elusive as it is proving for Prodi to reform the EU in a manner which can really take on the enlargement project.

Alfred Mifsud

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