- The Washington Times - Monday, February 19, 2001

Of the dozen European Union countries that have adopted the euro, Ireland enjoys the strongest growth rates, the lowest taxes, the highest productivity increases and the most open economy.

And as of last week, the "Celtic tiger" has another distinction within the euro zone: It is the first country to be reprimanded by its EU partners for mishandling its economy.

The unlikely clash has sparked bitter words between Brussels and Dublin, raised fresh questions about the euro and its effects on national sovereignty, and even spilled over into Britain, where Prime Minister Tony Blair's planned pre-election spending spree has also been criticized by EU officials.

"Sorry, but sometimes the teacher has to punish the best pupil," European Commission President Romano Prodi told reporters earlier this month in Brussels.

The commission is the executive arm of the EU and the most ardent backer of the idea of a common currency and a common economic strategy for the continent.

"People have to accept peer pressure and adjust their economic policies accordingly," said Pedro Solbes, the EU's commissioner for economic and monetary affairs.

But Irish Finance Minister Charlie McCreevy countered that nations have the right to set their own fiscal policies, even if they have signed on to the euro project. And he made clear he felt Ireland had little to learn from its continental partners on how to manage its economy and spur growth.

"My response is that the policies being pursued in Ireland have led to economic success," Mr. McCreevy said last week. "Perhaps when other countries in Europe have that sort of success, I will take more cognizance."

The dispute centers on the Irish government's plans to cut taxes and raise spending, even though the economy is soaring, unemployment is a minuscule 3.6 percent and inflation last year hit 5.3 percent, more than twice the European Central Bank target.

The 11 other EU finance ministers argue that the budget will fuel inflation, the fiscal equivalent of throwing more logs on the fire when the house is in danger of burning down. They say they have gotten promises from Mr. McCreevy in the past to coordinate policy with slower-growing economies such as France, Germany and Italy, promises that were ignored when the new Irish budget was outlined in December.

Analysts said an unspoken theme in the reprimand was resentment that Ireland has been a major beneficiary of EU subsidies in the past and is now passing the bounty on to its own taxpayers.

"A reprimand is practically the only option for sanctions if a country doesn't act in the way it promised," said Juergen Stark, vice president of Germany's Bundesbank.

Dublin argues that the Irish economy, which grew an eye-popping 8 percent a year in the late 1990s, can absorb the tax cuts and spending increases because of Ireland's rising productivity rates, relatively low labor costs and an international competitiveness that the more regulated continental economies can't match.

Mr. McCreevy has even predicted Irish inflation will fall this year, despite the fiscal stimulus.

And besides, Irish government officials say, the dynamic Irish economy has nothing to learn from its EU partners.

"We are the most open economy in the European Union, and Irish inflation is not determined by fiscal stances there," Mr. McCreevy said.

But the government's stance has provoked criticism inside Ireland itself, where the opposition parties charge the government has risked international isolation while ignoring past EU pleas.

"Mr. McCreevy has succeeded in creating a national embarrassment for Ireland out of an issue that could have been dealt with through quiet diplomacy," said Joe McCartin, a member of the opposition Fine Gael party who serves in the European Parliament in Strasbourg, in an interview last week with the Irish Times.

Although it represents just 1 percent of the GDP of the 12 euro-zone countries, Ireland's plight has provoked an outsized reaction from the traditionally euro-skeptic British press and major media outlets on the continent.

The German edition of the Financial Times wrote in an editorial that "the island state is itself to blame for the reprimand."

"If the Irish had taken economic policy coordination more seriously from the start, it would never have gotten this far."

But many leading papers in Britain, by far the largest EU economy that has not yet committed to the euro, were critical of the EU rebuke, predicting it would damage the Blair government's efforts to reverse strong anti-euro sentiment at home.

As they were criticizing Dublin last week, the EU foreign ministers also slammed spending increases long planned by the Labor government in London in advance of an expected general election May 3.

Over the objections of Chancellor of the Exchequer Gordon Brown, the EU ministers said the spending increases violate EU financial rules because Britain will have to borrow in the future.

"We do not accept this," Mr. Brown said after the Brussels meeting.

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