When the European Commission formally criticised the Irish government on 12 February for the supposed looseness of its fiscal policy, there was a very hostile reaction—not only in Ireland (Eire), which is justly proud of its startling economic performance over the past decade, but also in the UK.

Along with the criticism levelled at Dublin by the Commission, which was acting at the direction of European finance ministers, disapproval of a milder nature was also directed at Britain's own public spending plans. This provoked the predictable response from the British government and press, which united in condemning the Commission's move. Self-obsessed as ever, the UK media focused on the implications for Britain and Ireland: here was evidence of what life would be like inside the euro.

But the significance of this episode is even greater for the European Union (EU) candidate countries of Central and Eastern Europe (CEE), and this is a story that has been overlooked. The way that Ireland is treated now provides a foretaste of life in the euro, and an insight into how fellow EU members may behave towards the relatively weak new member states after eastward enlargement has taken place. That should give them some food for thought.

Ireland's economic miracle

Since 1995, Ireland's remarkable annual growth rates (almost ten per cent last year, and averaging over eight per cent throughout the period) have seen it outpace almost any other country in the world, let alone Europe. This has occurred at the same time as the country has achieved the soundest public finances in the EU: a current budget surplus of 4.6 per cent of GDP per annum, with a public debt of under 40 per cent of GDP—and predicted to fall to 20 per cent by 2004.

With Ireland also enjoying low interest rates, falling taxes, rising welfare spending, soaring inward investment, wage and price stability, and improving infrastructure, it has truly merited its new nickname: the "Celtic Tiger."

Certainly Ireland has benefited greatly from EU membership: transport and telecommunications have been stimulated by EU structural and cohesion funds, while agricultural subsidies have made Irish farmers comparatively wealthy. Signing up to join the euro while the German economy was depressed kept Irish interest rates low and helped thereby to fuel the spectacular growth.

But Ireland's economic miracle in the past few years has largely been of its own making: open markets, sound public finance, lower taxes (including corporate taxes as low as 20 per cent) and improving education have made the emerald isle a magnet for foreign investors.

Should Ireland's inflation cause concern?

The only blot on the Irish copybook has been the recent rise in inflation, which, fed by fuel price rises, hit seven per cent in December 2000, easily the highest in the EU, before falling back as the price of oil topped out. Finance Minister Charles McCreevy's recent budget surprised many by being mildly expansionary, reducing taxes and increasing spending.

Although this budget broke neither the Maastricht criteria for euro membership nor the rules of the Stability and Growth Pact, it did cause European finance ministers to furrow their brows. Meeting to conduct a "peer review" of each other's economies, a process in which both Ireland and Britain take part, they decided to wade in and call for Ireland to carry out a fiscal tightening of 0.5 per cent of GDP. McCreevy, backed overwhelmingly by Irish public opinion, rejected the warning.

Why the big fuss?

Why had McCreevy's counterparts picked on him? The European Commission, along with many economists and officials, hold that under the single currency there must be more coherence in financial policy throughout the eurozone.

Not everyone shares this viewpoint: many in the UK and elsewhere see tax and spending as matters for national decision-making alone, while The Economist argues that with the European Central Bank setting monetary policy under the single currency, "countries should be allowed more freedom to set their own fiscal policies, not less."[1]

Given the soundness of Irish finances and the success of its performance, and the relative smallness of its economy (inflation in Ireland has negligible effect on its European partners), many commentators saw this as a case of the EU making an example of little Ireland as a warning to bigger countries that might be tempted to relax financial constraints in the future—such as, for example, Italy, after a 2001 election won by Silvio Berlusconi.

There was a widespread belief that, if this were the EU's intention, it had backfired. As The Economist put it: "To launch a scarcely credible attack now on the euro's most successful member is no way to boost the credibility or authority of any future attacks."[2]

A boon for the Eurosceptics

As if this were not enough, Brussels provided further manna from heaven for Britain's celebrated and voluble Eurosceptics. The British Chancellor (finance minister) Gordon Brown was gently chastised by his fellow finance ministers for projecting a budget deficit of one per cent of GDP in 2004, caused by his planned (and much-needed) spending increases for transport, health, education and policing. He too rejected his reprimand.

Of course nothing would be likely to raise the hackles of the Brits quite like unwelcome interference from Brussels. Britain is one of only three current EU members not committed to joining the euro (Denmark and Sweden are the other two), and this rebuke would seem to provide another setback for supporters of the euro.

Right now, backing for euro membership is low in the UK, which can be interpreted in one of two ways: either voters dislike the single currency proposition itself, or alternatively this hostility to the euro may just be part of the present unpopularity of the EU in general. The October 2000 Eurobarometer survey recorded that only 25 per cent of Britons believe EU membership is good for their country; as recently as 1991 this figure was 57 per cent. Timothy Garton Ash noted recently that British attitudes to the EU have undergone cyclical downturns and revivals ever since Britain joined the community in 1973, and the current slump in support for the EU may be a passing phase only.[3]

Even for those Britons keen on joining the euro, or those remaining to be convinced either way, it seemed a fairly pig-headed decision to criticise not only the British economy, which is doing quite well at the moment, but also the Irish—the most successful in Europe—on what all the British press agreed were flimsy grounds.

The big story

This reaction has been quite predictable. But amidst all the concern about how the British Isles will be affected, a big story has been missed here. Read how some of the British press described Ireland's current situation, and the story should become clear.

"Ireland has been transformed in less than a decade from the EU's third poorest member into one of its richest," wrote Anatole Kaletsky in The Times.[4]

The Economist observed, "This small, once-poor country has been catching up with its richer partners, which is meant to be one of the purposes of joining the European Union in the first place."[5]

And in the words of an editorial in Financial Times: "Huge amounts of foreign direct investment have turned what was primarily an agricultural country into a high-skill, high-technology economy."[6]

Looking ten or fifteen years ahead, these are surely descriptions of the dream scenarios for the likes of Hungary, Poland, Czech Republic, Slovenia and Estonia, lining up in the front rank of EU applicant states. They hope to be tomorrow's Ireland. So what must these potential new member states make of how today's Ireland has been treated? It is surely a little ominous.

Reinforced scepticism

The conclusions that they should draw are twofold: firstly, this episode will only serve to increase the growing scepticism in CEE countries about the way the EU's major powers behave towards less powerful states. Britain may worry itself over France and Germany running the show, but smaller states are more inclined to lump all the big states together (including Britain) as selfish and overbearing influences, fond of cutting deals at EU summits to suit themselves.

The increase in voting weight given at the Nice summit to larger countries, particularly Germany whose economic presence towers over the CEE region, will reinforce those fears. Of the applicant states, only Poland will have voting power anywhere near comparable to the current major EU states.

The euro: to join, or not to join

Secondly, prospective member states must weigh carefully the possible costs and benefits of euro membership. Once inside the single currency, should one of them follow Ireland's example and enjoy a surge of prosperity, outdoing its fellow euro members, it may yet find itself hampered by over-stringent edicts from Brussels. Or even, pace Ireland perhaps, made an example of, for the benefit of other, bigger states.

Conversely, if one of them were to endure a serious slump at a time when the economies of the major EU states were relatively stable, it may find itself unable to apply the necessary corrective measures in the short or medium term due to monetary and fiscal constraints.

One size need not fit all.

The euro is a something of a leap in the dark for all, and for the CEE states the gamble may be all the greater. But EU enlargement need not take the form of "all or nothing." For some CEE states, EU membership without euro membership may be preferable. The economies of the candidate states are different from those of current EU members, and differ amongst themselves too, so early euro membership may not always prove advantageous.

So the EU must continue to allow economic diversity even within its Fortress walls. It would be sensible if enlargement negotiations were carried out with this, the Irish lesson, in mind.

Oliver Craske, 5 March 2001

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Sources:

Financial Times
The Economist
The Times

Endnotes:

1. "Ireland's euro-sins," The Economist, 17 February 2001, 24-26
   
2. ibid.
   
3. Timothy Garton Ash, "Is Britain European?," Prospect, February 2001, 26-30
   
4. Anatole Kaletsky, "Reprimand show folly of pulling tail of Celtic tiger," The Times, 2 February 2001
   
5. "Ireland's euro-sins," The Economist, 17 February 2001, 24-26
   
6. "Peer pressure," editorial in Financial Times, 13 February 2001