The European Union has extended its suspension of rules against excessive spending by member state governments due to Russia’s war in Ukraine.
“Increased uncertainty and strong downside risks to the economic outlook amid the war in Ukraine, unprecedented energy price hikes and continued supply chain disruptions warrant the extension,” said the European Commission this morning.
The rules governing debt and deficit spending, known as the Stability and Growth Pact (SGP), were suspended in March 2020 due to the Covid-19 crisis.
The rules were to be reactivated on January 1, 2023, but Russia’s invasion of Ukraine prompted the Commission to suspend the rules until 2024.
“This gives national fiscal policies space to react quickly when needed,” said Commission Vice-President Valdis Dombrovskis.
According to the Commission’s latest report, Ireland will be mainly indirectly affected by the war in Ukraine and the energy crisis, as it has limited direct commercial and financial links with Russia and depends on the United Kingdom for energy.
The so-called European Semester, which has provided guidance to Member States’ economies since the euro financial and debt crisis, says “Ireland is about to indirectly experience some slowdown in growth through other European economies, with which it trades extensively, as well as rising global energy prices and supply shortages for certain goods.”
While Russia accounts for 0.4% of Irish exports and 0.6% of imports, mainly in the biopharmaceutical and fertilizer sector, the biggest impact has been on aircraft leasing companies, whose aircraft have been appropriated by Russia following Western sanctions.
Ireland depends almost exclusively on energy imports from the UK.
Today’s report says the influx of 80,000 to 100,000 Ukrainians ‘will require additional social spending but could also have a positive impact on the tight Irish labor market’, as Ukrainians will have the right to work.
The European Commission says the Irish financial sector has “significant” exposures to Russia worth €49 billion.
“However, €37 billion of this sum is held by special purpose entities run by Russian companies or banks, which have very limited or no links to the Irish economy,” the report said.
Investment funds based in Ireland hold €11.5 billion in Russian exposures (0.3% of their total assets), including €5.1 billion in Russian government bonds.
In general, rising energy prices have fueled inflation in Ireland, which the invasion risks exacerbating. Rising oil and gas prices, as well as bottlenecks in the supply of goods or their components, have led to an increase in inflation in 2021.
In February, the harmonized consumer price index was 5.7% higher than a year earlier, in line with the euro zone average of 5.8%.
Inflation is expected to continue to rise in 2022, rising to 6.1% before falling back to 3.1% in 2023, due to “still high energy prices and supply bottlenecks”. .
The report says “rising wages could start to add to price pressures.”
The European Semester report states that higher energy inflation places “a greater burden on disadvantaged groups (including low-income, rural and elderly households), as their energy-related expenditure typically accounts for a higher share of their overall expenditure.
Overall, Ireland’s performance during the pandemic has been better than that of most member states, with public finances “presenting no short-term sustainability issues”.
The deficit of 1.9% in 2021 is expected to fall to 0.5% in 2022 and the budget balance will return to a surplus of 0.4% in 2023, according to the Commission.
While the risks associated with a possible ECB interest rate hike are low “because only a small portion of Ireland’s public debt has to be repaid in the short term”, future increases in capital expenditure linked to the increase housing stock and climate transition “could test” the government’s commitment to cap overall growth in basic spending at a rate “in line with trend growth in the economy (estimated by the authorities at 5%)”.
The report says Ireland needs structural reforms in health and long-term care as the country still faces a shortage of doctors and nurses.
“In addition, Ireland remains the only country in Western Europe without universal coverage for a set of basic health services, such as primary care.
“Most of the population is not covered by a medical card and must pay the full cost of doctor visits and outpatient prescriptions up to a certain threshold. The aging of the population will put more and more the Irish long-term care system under considerable pressure.”
The Commission also warns that house prices and rents continue to accelerate due to continuing shortages in housing supply.
“In the short term, the gap between supply and demand for housing is expected to remain wide.”
The report adds: “Deteriorating housing affordability, rising rents in 2021 and pandemic-induced delays in construction activities have exacerbated the problem. people by historical standards.”