Ireland vulnerable to ‘macroeconomic imbalances’, EC warns

Ireland is vulnerable to "macroeconomic imbalances" despite substantial improvements in its economic performance, the European Commission has warned. The commission is also critical of both the Republic's corporate-tax strategy and its efforts to address climate change. It calls too for faster and durable cuts in long-term mortgage arrears, acknowledging a need for write-offs where loans are unrecoverable.

In its latest assessment of the economy the commission urges the Government to use “windfall gains” to cut debt and to broaden the tax base. It also calls for measures to address “cost-effectiveness” within the healthcare system and for pension reform.

The nonbinding “country-specific” recommendations to member states published on Wednesday form part of the annual semester process that sees the commission discuss and co-ordinate national budgetary and reform policies with them. The member states are expected to take into account these recommendations when they define their budget for the following year. Finance ministers will discuss the recommendations in June and agree their final version.

The commission says that the Republic is experiencing macroeconomic imbalances. It points to high public and private debt but acknowledges that the activities of multinationals need to be taken into account when assessing this, while it notes that household debt seems to be “broadly in line with fundamentals”.

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The assessment says that the macroeconomic scenario underpinning the Government’s budgetary projections “is plausible”. The commission also notes that measures needed to support the planned deficit targets from 2019 onwards “have not been sufficiently specified”.

The analysis highlights variations between measurements of Irish GDP and domestic Irish output and how this affects the State’s debt-to-GDP ratio and advises that windfall gains be used to reduce this.

Corporate-tax regime

The commission sees the Irish corporate-tax regime in the context of the “essential” need to fight Europe-wide against “taxpayers’ aggressive tax planning”, which is distorting competition between firms, providing unfair treatment of taxpayers and undermining public finances.

It is critical of the Government’s approach to climate change, warning that measures in place will not enable the State to meet Europe 2020 climate goals domestically. This will mean the Republic will need to buy greenhouse-gas-emission allocations from other member states if it is to meet targets.

The commission is also cautious about the Irish banking system, citing “legacy issues”, with more to be done to reduce the debt overhang from nonperforming loans. It calls for faster and durable reductions in long-term mortgage arrears, building on initiatives for vulnerable households and encouraging write-offs of unrecoverable exposures.

Access to affordable, full-time and high-quality childcare also remains a challenge, the report says. According to the Organisation for Economic Co-operation and Development, childcare costs in Ireland, relative to wages, were in 2015 the highest in the EU for lone parents and the second highest in the EU for couples.

The report also recommends that Ireland should foster productivity growth in small and medium-sized enterprises by stimulating research and innovation with targeted policies, more direct forms of funding and more strategic co-operation with foreign multinationals, public research centres and universities.

Strongest growth

Overall, Valdis Dombrovskis, vice-president for the euro and social dialogue, said: "Europe has experienced the strongest growth in a decade, and it is set to continue this year and next. However, new risks are emerging, such as volatility in global financial markets and trade protectionism.

“We should use the current good times to strengthen the resilience of our economies. This means building fiscal buffers, which would give countries more manoeuvring space in the next downturn. This also means structural reforms to promote productivity, investment, innovation and inclusive growth.”

Much attention was focused today on the recommendations for Italy, whose soon-to-be-formed government has promised radical tax-cutting and revenue-increasing measures, in clear breach of European Union budget-deficit guidelines. Its national debt, at 130 per cent of GDP, is of serious concern to both markets and fellow member states.

The commission also reported that after nine years France has successfully emerged from the disciplines of the excessive-deficit procedure.