Recommendation for a COUNCIL RECOMMENDATION With a view to bringing an end to the situation of an excessive government deficit in Ireland
Date: 2010-12-03
Institutions: European Commission
Subjects: EU aid, Ireland, economic stabilisation, financial aid, macroeconomics, reflation

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EUROPEAN COMMISSION 

Brussels, 3.12.2010 
SEC(2010) 1515 final 

Recommendation for a 

COUNCIL RECOMMENDATION  

With a view to bringing an end to the situation of an excessive government deficit in Ireland 

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Recommendation for a 

COUNCIL RECOMMENDATION  

With a view to bringing an end to the situation of an excessive government deficit in Ireland 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 126(7) in conjunction with Article 126(13) thereof;  

Having regard to the recommendation from the Commission, 

Whereas: 

(1)  According  to  Article  126(1)  of  the  Treaty  on  the  Functioning  of  the  European  Union 
(TFEU) Member States shall avoid excessive government deficits.  

(2) The Stability and Growth Pact is based on the objective of sound government finances as a 
means  of  strengthening  the  conditions  for  price  stability  and  for  strong  sustainable  growth 
conducive to employment creation. 

(3)  The  2005  reform  of  the  Stability  and  Growth  Pact sought to strengthen its  effectiveness 
and economic underpinnings as well as to safeguard the sustainability of the public finances 
in the long run. It aimed at ensuring that in particular the economic and budgetary background 
was taken into account fully in all steps in the excessive deficit procedure (EDP). In this way, 
the Stability and Growth Pact provides the framework supporting government policies for a 
prompt return to sound budgetary positions taking account of the economic situation. 

(4) According to Article 3(5) of Council Regulation (EC) No 1467/97, if effective action has 
been taken in compliance with a Recommendation in accordance with Article 126(7) of the 
Treaty  and  unexpected  adverse  economic  events  with  major  unfavourable  consequences  for 
government  finances  occur  after  the  adoption  of  that  Recommendation,  the  Council  may 
decide,  on  a  recommendation  from  the  Commission,  to  adopt  a  revised  Recommendation 
under Article 126(7) of the Treaty. 

(5) On 27 April 2009, the Council decided, in accordance with Article 104(6) of the Treaty 
establishing the European Community (TEC), that an excessive deficit existed in Ireland and 
issued  recommendations  to  correct  the  excessive  deficit  by  2013  at  the  latest.  The  Council 
also set a deadline of 27 October 2009 for effective action to be taken.  

(6) On 2 December 2009, the Council concluded that the Irish authorities had taken effective 
action in compliance with the Council recommendations of 27 April 2009 but that unexpected 
adverse  economic  events  with  major  unfavourable  consequences  for  government  finances 
could  be  considered  to  have  occurred  in  Ireland.  The  Council  therefore  adopted  a  revised 
Recommendation  under  Article  126(7)  of  the  Treaty,  postponing  the  deadline  for  the 
correction of the excessive deficit to 2014.  

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(7)  On  13  July  2010,  the  Council  concluded  that  the  Irish  authorities  had  taken  effective 
action in compliance with the Council recommendations.  

(8) According to the Commission services' autumn 2009 forecasts, which provided the basis 
for the Council's December 2009 recommendations issued to Ireland under Article 104(7) of 
the Treaty, real GDP was expected to contract by 1.4% in 2010, followed by an expansion by 
2.6%  in  2011.  According  to  the  Commission  services'  autumn  2010  forecasts  and  the  most 
recent  assessment  made  by  the  Commission  services,  the  decline  in  output  in  2010  is  now 
expected to have stood at just 0.2%. However, the economic outlook has worsened over the 
last months, with real GDP growth now projected at 0.9% in 2011 and 1.9% in 2012 in the 
Commission  services  autumn  2010  forecast.  Moreover,  the  impact  of  the  crisis  on  the 
financial  sector  has  turned  out  to  be  much  more  pronounced  than  anticipated.  The  support 
measures  deemed  necessary  to  preserve  financial  stability  and  restore  confidence  in  the 
banking  sector  and  thereby  support  the  economy's  return  to  sustainable  growth  have  a  very 
large additional budgetary cost. Due to the unforeseen capital injections in the banking sector 
and  an  increase  in  the  sovereign  funding  costs,  interest  expenditure  relative  to  GDP  is 
projected to increase by 2.3 pps. by 2014 compared to the projections in the December 2009 
Stability Programme. 

(9)  As  a  consequence,  the  fiscal  situation  is  significantly  worse  than  expected,  with  the 
Commission  services'  autumn  2010  forecast  projecting  the  headline  general  government 
deficit to reach 32.3% of GDP in 2010. This reflects the large one-off banking sector support 
measures. Without these measures, the deficit would have been expected to measure12.5% of 
GDP in 2010. This is worse than the 11.6% of GDP projected in the December 2009 Stability 
Programme update but markedly better than the 14.7% of GDP projected on the basis of a no-
policy-change assumption in the Commission services' autumn 2009 forecast underlying the 
December 2009 Council Recommendation. Relative to this no-policy-change path, and in line 
with the December 2009 Council Recommendation, a fiscal consolidation package of 2½% of 
GDP  was  included  in  the  budget  for  2010,  and  fully  implemented.  The  cyclically  adjusted 
deficit net of one-off effects is estimated to have widened by 1¼ percentage points of GDP to 
around  11%  of  GDP  in  2010.  However,  this  reflects  developments  in  revenue  elasticities 
during  the  deep  recession  rather  than  discretionary  measures.  On  the  contrary,  large 
consolidation packages have been adopted since mid-2008, amounting to some 9% of GDP in 
2009-10.  

(10) The Irish economy is projected to record lower growth rates in the immediate post-crisis 
period  compared  to  the  pre-crisis  boom  period.  In  the  Commission  services  autumn  2010 
forecast,  real  GDP  growth  is  projected  at  0.9%  in  2011  and  1.9%  in  2012.  According  to 
current Commission projections real GDP growth of 2.5% in 2013, 3.0% in 2014 and 3.0% in 
2015  is  expected.  Price  developments  are  also  expected  to  be  moderate.  Nominal  GDP  is 
projected to increase by 1.3% in 2011 and 2.7% in 2012 in the Commission services autumn 
2010 forecast, while increases by 3.8% in 2013, 4.6% in 2014 and 4.8% in 2015 are expected 
according  to  current  Commission  projections.  Given  these  macroeconomic  assumptions, 
reducing the government deficit to below 3% of GDP by 2015 would require an improvement 
in the structural balance of at least 9½% of GDP over the period 2011-2015.  

(11) Overall, in view of the above considerations, unexpected adverse economic events with 
major  unfavourable  consequences  for  government  finances  can  be  considered  to  have 
occurred after adoption of the Recommendation under Article 126(7) of the Treaty. Moreover, 
the  conclusion  reached  by  the  Council  on  13  July  2010  that  Ireland  had  taken  action 
representing adequate progress towards the correction of the excessive deficit remains valid. 

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Finally,  the  higher  starting  point  for  the  government  deficit,  compounded  by  the  worse 
macroeconomic outlook and higher than foreseen interest expenditures make the achievement 
of 
this  background,  revised 
recommendations under Article 126(7) of the Treaty extending the deadline for the correction 
of the excessive deficit by one year to 2015 are justified. 

initial  deficit  reduction  path  unfeasible.  Against 

the 

(12) Gross public debt increased from 25% of GDP in 2007 to 65.5% of GDP at end 2009, 
thereby  breaching  the  60%-of-GDP  reference  value  of  the  Treaty.  The  ratio  is  projected  to 
increase to 97.4% of GDP at end 2010 in the Commission services' autumn 2010 forecasts. 
The increase relative to the low pre-crisis level has been fuelled by a large primary general 
government deficit emerging in the course of this crisis. Measures to support the vulnerable 
banking sector made a significant contribution to the increase in deficit and debt in 2009 and 
2010  of  around  22½  percentage  points  of  GDP  in  cumulative  terms  over  the  two  years. 
Moreover,  increased  interest  payments  are  feeding  into  debt  developments.  Achieving  a 
revised deficit reduction path leading to a deficit below 3% of GDP in 2015 would imply that 
the  debt  ratio  would  stabilise  in  2013  and  start  declining  thereafter.  Debt  dynamics  are 
affected  by  several  below-the-line  operations,  which  are  projected  to  increase  the  debt-to-
GDP ratio by 5.3 pps. of GDP in 2011, 0.8 pp. in 2010 and reduce it by 1.3 pps. in 2013, 1.1 
pps.  in  2014  and  1  pp.  in  2015.  These  include  projected  capital  injection  into  banks  and 
reductions in cash reserves in 2011, as well as differences between accrued and cash interest 
payments. 

(13)  On  24  November  2010  the  authorities  published  a  comprehensive  National  Recovery 
Plan 2011-2014 setting out detailed fiscal consolidation plans aiming at putting gross public 
debt on a firm downward path by reducing the deficit over the horizon of the plan. An overall 
consolidation  effort  of  EUR  15bn  is  envisaged  over  the  period,  effectively  doubling  the 
adjustment  of  EUR  7.5bn  foreseen  in  the  December  2009  Stability  Programme  update.  The 
adjustment is clearly frontloaded, with a EUR 6bn consolidation package planned for 2011. It 
is foreseen that two thirds of the adjustment should be made on the expenditure side. The plan 
also sets out structural reforms, notably in the labour market. Moreover, the authorities have 
developed  a  comprehensive  strategy  to  overhaul  the  financial  sector.  The  strategy  aims  at 
restoring confidence in the sector, achieving a substantial downsizing of the sector, isolating 
the viable parts of the system and returning the sector to healthy functionality, supported by 
adequate recapitalisation measures.  

(14) In order to further enhance the credibility of the medium-term consolidation strategy, it 
will be crucial to address the weaknesses of the budgetary framework. Ireland should adopt 
and  implement  the  fiscal  rule  that  any  additional  unplanned  revenues  in  2011-2015  will  be 
allocated to deficit and debt reduction. In accordance with the proposal set out in the National 
Recovery Plan 2011-2014, Ireland should establish a budgetary advisory council to provide an 
independent  assessment  of  the  Government's  budgetary  position  and  forecasts.  Finally, 
adoption of a Fiscal Responsibility Law introducing a  medium-term expenditure framework 
with  binding  multi-annual  ceilings  on  expenditure  in  each  area  would  support  the  planned 
adjustment. This shall be made taking into account any revised economic governance reforms 
at EU level and build on reforms already in place.  

(15) The long-term budgetary impact of ageing in Ireland is above the EU average, mainly as 
a  result  of  a  relatively  high  projected  increase  in  pension  expenditure  over  the  coming 
decades.  The  budgetary  position  in  2010  compounds  the  budgetary  impact  of  population 
ageing  on  the  sustainability  gap.  Improving  the  primary  balance  over  the  medium  term  and 

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further reforms would contribute to reducing the risk to the long-term sustainability of public 
finances. 

(16) Enhanced surveillance under the EDP, which seems necessary in view of the deadline for 
the  correction  of  the  excessive  deficit,  will  require  regular  and  timely  monitoring  of  the 
progress  made  in  the  implementation  of  the  fiscal  consolidation  strategy.  In  this  context,  a 
separate  chapter  in  the  updates  of  the  Irish  stability  programme  which  will  be  prepared 
between  2009  and  2015  could  usefully  be  devoted  to  this  issue.  Moreover,  monitoring  of 
fiscal  targets  will  be  undertaken  in  line  with  the  provisions  of  the  financial  assistance 
programme for Ireland as also set out in the [7] December 2010 Council Decision on granting 
Union financial assistance addressed to Ireland.  

HEREBY RECOMMENDS:  

1. 

2. 

3. 

4. 

1 

Recognising that Ireland’s worse budgetary position in 2010 resulted from the impact 
of  the  crisis  on  government  revenue  and  the  financial  sector,  requiring  the 
implementation of very large financial sector support measures, the Irish authorities 
should put an end to the present excessive deficit situation by 2015. 

The Irish authorities should bring the general government deficit below 3% of GDP 
in a credible and sustainable manner by taking action in a medium-term framework. 
Specifically, to this end, the Irish authorities should: 

(a)  Implement  measures  such  that  the  general  government  deficit  does  not  exceed 
10.6% of projected GDP in 2011, 8.6% of GDP in 2012, 7.5% of GDP in 2013, 5.1% 
of GDP in 2014 and 2.9% of  GDP in 2015, and where the projected annual deficit 
path  does  not  incorporate  the  possible  direct  effect  of  potential  bank  support 
measures in the context of the government's financial sector strategy as set out in the 
Memorandum  of  Economic  and  Financial  Polices  (MEFP)  and  specified  in  the 
Memorandum  of  Understanding  to  be  signed  by  the  Commission  and  the  Irish 
authorities.  Ireland  shall  stand  ready  to  take  additional  consolidation  measures  to 
ensure reducing the deficit to  below  3% of GDP in 2015 in case downside risks to 
the  deficit  targets  materialise.  Further,  this  path  is  consistent  with  the  preliminary 
view of Eurostat on the ESA95 accounting treatment of time of recording of interest 
payments on promissory notes payable to Anglo Irish Bank1, such that a revision of 
that view would result in a revision of the deficit path; 

(b) Achieve an improvement in the structural balance of at least 9½% of GDP over 
the period 2011-2015; 

In  addition,  the  Irish  authorities  should  seize  opportunities,  including  from  better 
economic conditions, to accelerate the reduction of the gross debt ratio back towards 
the 60% of GDP reference value. 

To  limit  risks  to  the  adjustment,  Ireland  should  establish  a  budgetary  advisory 
council  to  provide  an  independent  assessment  of  the  Government's  budgetary 
position and forecasts. Ireland should adopt a Fiscal Responsibility Law introducing 

See 
http://epp.eurostat.ec.europa.eu/portal/page/portal/government_finance_statistics/methodology/advice_
member_states. 

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5. 

6. 

a  medium-term  expenditure  framework  with  binding  multi-annual  ceilings  on 
expenditure in each area. 

To  reduce  the  risks  to  the  long-term  sustainability  of  public  finances,  the  Irish 
authorities should pursue further reforms to the social security system. 

The Council establishes the deadline of 7 June 2011 for the Irish government to take 
effective action to specify the measures that will be necessary to progress towards the 
correction of the excessive deficit. The assessment of effective action will take into 
account  economic  developments  compared  to  the  economic  outlook  in  the 
Commission services' autumn 2010 forecast.  

The  Irish  authorities  should  report  on  progress  made  in  the  implementation  of  these 
recommendations in a separate chapter in the updates of the stability programmes which will 
be prepared between 2011 and 2015. 

Further, the Council invites the Irish authorities to implement reforms with a view to raising 
potential  GDP  growth.  In  addition,  Ireland  is  invited  to  foster  a  swift  adjustment  to 
sustainable  medium-term  growth  by  productivity-enhancing  measures  and  appropriate  wage 
policies to help restore competitiveness. 

This Recommendation is addressed to Ireland. 

Done at Brussels, […] 

For the Council 

The President 

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