We are the neighbours from hell

You know the image.  There’s one house in the estate that’s always trouble.  Every time they walk in the door, the neighbours are looking through the curtains wondering what trouble will be coming this time.

That’s Ireland in Brussels.  Because right after our Lisbon clanger, the ESRI is warning that we will be headed back there next year in our Hiace facing the Excessive Deficit Procedure under the Stability and Growth Pact.  This is because the budget deficit as a percentage of GDP will exceed 3 percent in 2009 according to their forecast — and given the increasingly pessimistic trend of the recent revenue estimates, there’s little reason to doubt them.  In fact, we’ll be within 0.2 percent of the threshold even in this year, so if much else goes wrong this year, the problem could be arriving even sooner than we think.

So what does it mean?  Well, the main consequences of budget deficits are still domestic: either the government puts it right, or at some point the market for new government debt gets uglier and uglier.  But breaching the 3 percent level gets the European Commission on your back, with the possibility of an escalating set of sanctions including required deposits and even fines — the last thing the government will want to incur with the public finances so tight. 

Other countries have been there before (such as France and Italy), but have been able to bluster their way through it without the most onerous consequences — it’s been kept at the level of a few rude memos between the Commission and the respective finance ministries.  But that is all ultimately dependent on the goodwill of the European Council, which must approve the Commission’s measures.  And there is no national veto on the deficit procedure: if enough of the other ministers want to punish Ireland, they can do it by qualified majority voting.

Now there is an alternative scenario where Brian Lenihan tells his fellow ministers that if they really want a 2nd referendum, that would not be the time for lectures about the public finances.  But then the hard currency fans at the European Commission and European Central Bank will wonder whether a country can simply dodge the fiscal responsibility commitments of the Eurozone just by being difficult all the time.  There a lot of eggshells to cross over the next 2 years.