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Taking €15bn in spending from the Irish economy would handicap any economic growth for a decade, the ESRI believes. Niall Carson/PA Archive
The Lost Decade

Abiding by EU targets kills economy for a decade – ESRI

The economic think-tank says aiming for the EU’s 3% deficit target by 2014 will force Ireland into a downward spiral.

THE ECONOMIC and Social Research Institute (ESRI) has advised the government to seek the permission of the EU to change its medium-term financial policies – believing that aiming to reach EU budget deficit targets could lead to a “lost decade”.

A ten-year economic downward spiral – which the ESRI says would ensue if the government tries to reduce the budget deficit to 3% of GDP by 2014 – would leave 10% of the workforce unemployed.

Cutting government spending by enough to meet the 2014 target would puncture any economic growth, it said, with unemployment rising so quickly as a result that further spending cuts would have almost no effect whatsoever.

The Croke Park agreement outlining a pay deal with the public sector – agreed only as recently as June – may have to be cast aside, it added, as the government struggles to cope with its spending bill.

In its quarterly report, the ESRI recommended that the four-year budgetary timetable being currently prepared by the Department of Finance – which hopes to bring Ireland’s deficit back within the EU target of 3% of GDP – be extended to six years.

The government’s target of €7.5bn in budget cuts before 2014 would have to be doubled to meet the European target – but €15bn in cuts would cap any annual growth rate at 2.25% – not nearly enough to keep a sustainable employment cycle going.

Co-author Alan Barrett said he had “grave doubts over the wisdom of the parameters of an austerity programme where such a high level of savings will be sought in such a timeframe,” while another, Ide Kearney, said she was “very worried about this. It’s close to a tipping point. It’s not [just] a doomsday scenario where the country goes bust and the IMF comes in. It is a lost decade.”

The European Commission – which had been advocating the 2014 target – has poured cold water on the idea, however, with economics head Olli Rehn saying only the European Council (the meeting of European finance ministers) could amend the target.

The publication came as all-party talks on securing a consensus ended on the same day they began, with Labour leader Eamon Gilmore declaring the dissusions “over” after just two hours. Leaders had not reached agreement on whether to pursue the 3% target by 2014.

This lunchtime the Department of Finance ruled out seeking an extension on the 2014 deadline.

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