There is a long road to travel in developing an efficient way of co-ordinating economic policy across the euro zone. That much is clear from the continued tensions between the EU Commission and the Government on economic policy here. Again, yesterday, the Commission called for the Government to take "countervailing budgetary measures" this year to slow growth and warned that spending must be more tightly controlled in future. Both of these recommendations will displease the Minister for Finance, Mr McCreevy, who has already publicly resisted EU advice on budgetary matters.
The underlying issue is who controls budgetary policy in a monetary union. Most euro-zone member governments want to retain full control of their own tax and spending policies, but in turn would not be slow to criticise any other state which is seen to step out of line. In turn, the European Commission - and the European Central Bank - are trying to develop central monitoring of national budgets, which they believe is essential for the euro area to operate efficiently. Ireland has become the first major test case in this important policy area. In February, tensions broke out in public, following criticism by the Commission - subsequently approved by the other finance ministers - of the 2001 Budget package. The Commission has repeated these criticisms in its latest document and also called for the Government "to prepare a budget for 2002 that contributes to an orderly easing of demand."
The Government has indicated that it will seek to change these guidelines before they are formally approved. It is quite within its rights to do so and there are some aspects of the guidelines which are unclear and, in some cases, seem contradictory. For example, it is not clear whether the Commission is seeking the slowdown of capital spending under the National Development Plan. And it remains uncertain what kind of "countervailing budgetary measures" the Commission would wish to see this year.
It is essential that the dialogue on these issues between the Government, the Commission and the other member-states, is conducted in a measured and useful way. The Commission was unnecessarily heavy-handed in its initial statements on the issue; the Government here, in turn, did not handle the issue well and allowed a very public row to develop. Both sides need to engage more constructively now - the imminence of the Nice Treaty vote makes this more likely to happen.
The Commission's latest recommendations do raise some tricky issues for the Government. The EU officials have called for restraint on Government spending, which has been more or less abandoned in recent years. If Mr McCreevy ignores this, he risks a further reprimand. If he accepts the advice from Brussels, he will be unable to bring in the kind of pre-election spending increases which the Government would like. The appropriate stance for next year's Budget will depend very much on how the economy is performing later this year. The Commission sees risks to Ireland from the US slowdown, but is still optimistic about growth rates here. Both Mr McCreevy and the Commission will hope for a gradual easing in economic growth and a fall-off in inflationary pressures. If this happens, then agreement on the appropriate shape of the 2002 Budget between Brussels and Dublin will be easier to achieve.