The row between the European Commission and the Republic is likely to erupt again this year.

At its core is a battle over who really controls European fiscal policy. On one side are various national governments, ranging from Labour in Britain to the coalition in this State, and on the opposing side is the European Commission.

The Commission argues that it must play a part in economic governance and this is a necessary part of monetary union. If all member-states were to act as they pleased, it could affect European interest rates adversely, threatening the EU project. The argument has some validity. German reunification led to large interest-rate increases, not just in Germany but across the EU, as Mr John FitzGerald, professor at the Economic and Social Research Institute (ESRI), points out.

He believes this postponed the Republic's recovery until the latter part of the 1990s, which would otherwise have happened five years earlier. The logic of this is that maintaining discipline is more in the interests of small countries than large ones. The Republic could misbehave as much as the most profligate minister desired. The effect would be to damage the Republic's finances but it would have a negligible impact on, for example, Germany.

A similarly-minded Italian however, could force up interest rates for citizens in all 12 eurozone states.

To some extent, there is a pact that is designed to target this - the Stability and Growth Pact. It was signed in Dublin after hours of tortuous negotiation during the Republic's last EU presidency. The pact is designed to rein in certain excesses. Its central tenet is that deficits will be no higher than 3 per cent.

However, when economies are buoyant, such criteria is no good. The current spending of the State's Exchequer could run at its current extraordinarily high level of 21 per cent for more than three years before the State would run any deficit and far longer than that before it would reach 3 per cent.

The Commission's acting director general of economic and financial affairs said at a forum in Brussels last week: "Because budgets are closer to balance, we must focus our quest on controlling all wider economic considerations."

But why? To give a bureaucracy a raison d'etre? The problem is whether or not you believe that Finance Minister Mr McCreevy's budgets are good for the State - he and Fianna Fail were voted into office with a mandate to cut taxes.

The Commission appears keen to become a European government, but it is at least not yet directly elected.

In the meantime, the Commission is keen to extend its power and influence. Officials pay lip service to the so-called democratic deficit but privately scoff at European parliamentarians. They are interested in their own influence.

Officials are openly delighted that all member-states will now have to take them more seriously. Until this year, most member-states simply signed off on the guidelines and paid little attention to the detail. They were thought of as guidelines and not as targets that had to be met on pain of a penalty for failure.

That has now changed and, time after time, at last week's forum, the Republic was cited by Commission officials and Belgian politicians.

It is impossible to be certain, but the very clear impression is that this was the intention of making the recommendation against the Republic. It may also send a message to new EU member-states - but that was probably an ancillary benefit. The notion that it was about tax harmonisation is probably also wrong, although some member states certainly took that into account when deciding to back the Commission.

Mr McCreevy also did the process no favours. He appears to have few if any friends in Europe and it seems he could have diverted the worst of the criticism if he had had better diplomatic relations with his peers. That said, Department of Finance officials did the best they could in the circumstances.

The merits of the guidelines can also be argued. After all, we would be far better off if Mr McCreevy was forced to control spending. The ESRI's Prof FitzGerald believes it is impossible to see what improvement in services we are getting for the huge increase in spending. It is more likely that the money is simply being squandered. Spending needs to be reduced in volume terms to 3.5 per cent if surpluses of the same level are to be run for the remainder of the decade. This would mean value increases of around 8 per cent and would also allow for ongoing sizeable tax reductions of around the same order as the past few years. It would also mean fully implementing the National Development Plan, according to ESRI calculations.

The last Budget also arguably added to demand in the economy, although not, it has to be said, to measured inflation. But the point is whether there should be more debate about who is responsible for Irish fiscal policy and, if there is to be further co-ordination, how far will it go?

It is interesting that the Commission also appears to be taking on Britain's chancellor of the Exchequer, Mr Gordon Brown. Whatever the merits of fiscal co-ordination in a monetary union, the idea that the Commission should have an input into how independent currencies are run is almost laughable.

Britain must adhere to the Stability and Growth Pact if it is to join the euro in the future. But it is already doing so. How insisting that Britain's public spending does not exceed 37.3 per cent of gross domestic product is necessary for euro membership is hard to imagine. After the latest meeting of finance ministers, Mr Brown announced he was confident this could be changed. But within hours, the European commissioner Mr Pedro Solbes was insisting that this was not the case.

In Britain's and the Republic's case, the Commission is paying little attention to political and electoral reality. A referendum on the euro is likely in Britain and rows such as the one between Mr Solbes and the British government is merely ammunition for eurosceptics.

The same is true in the Republic, against the backdrop of the Nice Treaty referendum next month. An article the Tanaiste Ms Harney wrote in the Financial Times contained what the Commission insisted was a threat to vote against the treaty. In reality, ongoing rows over who should set Irish budgetary policy will certainly not make it easier to persuade the electorate to vote yes on this issue.