European Commission ‘may force more austerity on Irish State’

Ireland may face years more of damaging budget cuts because of the European Commission’s erroneous way of calculating structural deficits, a leading economist has said.

Willem Buiter, Citigroup global chief economist, said Ireland may have to implement unnecessary austerity measures because the European Commission calculated Ireland’s structural deficit using a population estimate taken from the height of the economic crisis, when emigration levels were rampant.

“It completely underestimated the elasticity of the Irish labour market,” said Mr Buiter. Over the past two years, the economy has rebounded strongly, which has led to net migration narrowing significantly. Mr Buiter, formerly a member of the Bank of England’s Monetary Policy Committee and a lecturer at Yale University, expected Ireland’s growth rate to be the highest in the EU for the foreseeable future.

“I did not think I would see a 5% growth rate in Europe again,” he said in Dublin following Citigroup’s annual meeting with investors.

At a broader level, Mr Buiter said the eurozone faces some intractable problems. If, as press reports suggest, the ECB’s proposed quantitative easing would involve national central banks buying up sovereign debt, that could pave the way for the dissolution of the eurozone. Greece in particular, but also Spain, Portugal, Italy, and France needed debt writedowns, and if their national central banks were holding huge amounts of sovereign debt at the time of the writedown, that would make them technically insolvent, said Mr Buiter. There is also a growing risk that an EU member state will elect a government that will opt for a unilateral debt writedown, which would mean expulsion from the eurozone.

What was needed for the eurozone to become a viable economic entity, said Mr Buiter, was a fiscal stimulus for periphery countries in exchange for deep and meaningful reforms that would be politically acceptable to the core countries and in particular, Germany. However, the political landscape at present suggested that this was not possible, he added.

Returning to Irish matters, Mr Buiter said he was not surprised by the backlash against water charges. After years of austerity, the level of voter fatigue with more tax increases was inevitable, he said, adding that water should be free for “socially acceptable levels” and then a punitive charge applied to usage above this level to ensure conservation.

Meanwhile, the markets would not be spooked by the possibility of a Sinn Féin government, said Mr Buiter, even though it is perceived as being on the radical left and some of its economic policies had the potential to cause economic damage.

“I don’t think anybody who, in 15 or 20 years, looks back at the economic data of a Sinn Fein government will notice a blip,” he said.