Wednesday, May 5, 2010

EU Commission changes tack

Just seven weeks since the EU Commission admonished Ireland for using “favourable” macroeconomic growth forecasts in our budgetary policy documents.

Back in March the Commission published their opinion on Ireland’s Stability Programme Update published in December 2009.  In the update the Department of Finance laid out the figures detailed how Ireland will get our budget deficit back under the 3% of GDP limit by 2014.  This is the table that shows us getting back to the magic 3% level.SPU Table 1 The macroeconomic forecasts on which this is based can be seen here.

The Commission’s Opinion concluded that these projections were vague and overly optimistic.  They said

The budgetary outcomes could be worse than targeted throughout the programme period, mainly due to

  1. The fact that the consolidation efforts planned after 2010 are not underpinned by broad measures and are of an indicative nature only;
  2. The programme's favourable macroeconomic outlook after 2010; and
  3. The risk of expenditure overruns in 2010 and also beyond, to the extent that the still to be spelled out strategy should rely on expenditure restraint.

This, together with the likely need for further support measures for the financial sector, implies that also the debt ratio could turn out higher than planned in the programme.

Today the Commission releases their Spring Forecasts for the EU Economics.  The report on Ireland can be seen here with their main forecasts shown below.

Commission Forecasts

The EU’s 2010 growth forecast is now better than the –1.3% included in the SPU and the 2011 forecast has jumped up to +3.0% just below the +3.3% used in the SPU.  Who is using favourable figures now?

The SPU has forecasted an average growth rate of 4% from 2012 to 2014 and the EU does not provide fresh forecasts for these figures.  Back in March they cast doubts on these but now they seem to have jumped on the ‘glass is half full’ bus.

Is this what the EU Commission actually believe or are they just trying to get some positive news out there in the midst of the Greek debt crisis and fears of contagion to the other PIIGS.  The final paragraph in the Irish section should be enough to inform us of the validity of these projections.

On 30 March 2010, the authorities announced the transfer of a first tranche
of loans to NAMA and the likely need for further capital injections into some banks. An effect of such capital injections on public finance developments within the forecast horizon cannot be excluded. However, in the absence of detailed information on the nature and size of these operations, the forecast does not include any impact.

One sentence after saying that the recaps “cannot be excluded”, the Commission admit that the they “do not include any impact” of NAMA and the recaps from their projections.  Billions of euro are committed to these ‘projects’ but the EU have decided to leave them out.  This comes only three weeks after the EU decided that the €4 billion Anglo Irish Bank recapitalisation should be included as part of the 2009 Budget Deficit.  This brought the deficit to the 14.3% of GDP figure seen in the table above.

Even excluding the banking commitments we have made the EU are projecting a budget deficit in 2010 of 12.1%.  Thus it may appear that our deficit is declining.  Now is seems the EU are in on our attempts to cook the books!

The Minister announced the details of the bank package back in March.  Surely this “was detailed information on the nature and size of these operations” that would have allowed these figures to be included.  If they were (as they should be) the projected budget deficit for Ireland would be close to 20%.

Are the EU afraid of spooking bond markets if they tell the truth?

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