Ireland in the Dock

The Committee of European Finance Ministers has censured Ireland and the Irish budget, invoking for the first time in EU history the powers conferred by Article 99 of the Treaty. That rebuke is being applied to perhaps Europe’s most successful economy, for Ireland has the EU’s second highest budget surplus, its second lowest level of public debt, and by far the highest growth in the 1990's of countries in the Monetary Union.

This step, and its motives, are without precedent. Ireland’s projected budget for 2001 foresees a slight reduction in public expenditures, from 31% to 30.8% of GDP, and a simultaneous reduction of taxes by about .6% of GDP. As a consequence, Ireland’s budget surplus will come down, according to forecasts, from 4.7 to 4.3% of GDP.

Few Europeans are losing sleep over Ireland’s unprecedented good times. Indeed, all the finance ministers who censured Ireland would like to face the same rosy economic data the Irish finance minister does. Yet, according to the European Commission and those same finance ministers, Ireland’s fiscal posture may generate strong inflationary pressures in an already overheated economy and so merits maximum punishment.

Censuring Ireland, however, is a dangerous mistake, both on the merits and from a methodological point of view. When a country is growing at the speed of Ireland – ie, a speed higher than Europe’s average – some inflation is not only inevitable but necessary. By increasing the “rate of real exchange,” inflation will help slow the Irish economy unless the growth of productivity is sufficient to maintain competitiveness.