Plans to cut carbon emissions and worries over volatile exchange rates, market turbulence and inflationary pressures dominate the conclusions reached by the European Council in Brussels yesterday.
Both of these will strain Ireland's economic performance over the coming year, illustrating how closely that is bound up with global developments. News that the Wall Street bank Bear Sterns is in acute difficulties and the continuing fall in the dollar's value indicate that conditions are likely to get worse in the short to medium term.
The summit confirmed the EU's own commitment to a 20 per cent cut in carbon emissions by 2020. Details will be negotiated by the end of the year, so that they can be adopted at the latest in early 2009, in time for the Bali follow-up conference in Copenhagen where a global agreement will be sought. There is a welcome determination to maintain the EU's ambitious approach which can set a standard in those talks. If they are successful, the EU's further commitment to a 30 per cent cut by 2020 will come into play. The difficulties are freely acknowledged, notably the need for balance between economic growth and different starting points of the member-states. There is a new recognition that market-based instruments such as carbon credit trading will be necessary to maintain that balance.
The Government did not convince the Commission to vary the methodology used to calculate Ireland's obligations under this scheme. Gross domestic product (GDP) figures are used which, it is argued, overstate this State's wealth compared to gross national product (GNP) because of the strong role of foreign companies here. Commission president José Manuel Barroso recalled the compensations received in the past from EU structural and cohesion funding, saying the GDP measurement is fairer for the EU as a whole. There seems little scope to raise the issue again, so the Government will probably lean even more heavily on carbon trading to achieve the targets. That is a short- term approach and no substitute for tackling unsustainable energy policies head on.
It will be a steep learning curve for all concerned, especially in an economic downturn. Much more will be heard about "carbon leakage" - the possibility that energy intensive industries will migrate to less onerous locations under such regulatory pressure. But all the scientific and economic evidence points to the need for changes to be made sooner rather than later, when they will become even more expensive to deliver. Real leadership is required to convince the public to make the necessary behavioural changes. The summit heard an alarming report on the international security implications of climate change, underlining a sense of urgency.
The conjoining of volatile currencies and turbulent markets with climate change makes this a critical juncture for the international system and Ireland's role within it. Remaining a central player in the EU gives us real leverage in response to such pressures. The summit correctly recognised that the fundamentals of the EU economy remain sound. Making sure that continues is a real challenge for its collective leadership.