Bertie Ahern: The Man Who Blew the Boom: Power & Money (26 page)

A short time later Ahern attended a function in Kavanagh’s offices in Wellington Road, Dublin. There were a number of people there from the construction industry, and Ahern gave a short speech. Afterwards he spoke privately to Kavanagh and said he regretted what had occurred, and he assured him that his donation had been received and was appreciated by the party. Kavanagh was satisfied and made another contribution. What is extraordinary about the whole affair is that the evidence was that Ahern, Ryan and Kavanagh had not mentioned amounts during their various conversations and so were never confronted with the fact that, while £100,000 had been handed over to Haughey (a quarter of it was intended for the Lenihan fund), only £25,000 had been handed over to Fleming.

Opinion polls during this period showed that there was lingering public concern about Fianna Fáil and its potential for corruption; but the main focus for most people, understandably, was on their own immediate financial circumstances. McCreevy’s early budgets all involved substantial tax-cutting measures in conjunction with transfer payment increases, significant capital spending and the reduction of the national debt. Especially for many younger people, Haughey and the evidence emerging at the tribunals were historical matters.

For politicians of Ahern’s generation the positive trends with the economy and the public finances constituted an extraordinary
volte face
. For a man who liked to cite statistics it was heaven indeed. Ahern frequently peppered his speeches with figures such as the amounts allocated to various projects, increases in transfer payments and changes in data, such as in the number of people employed. Furthermore, in his Government’s early years the rises in public spending that were introduced were broadly in line with economic growth. As the Government’s term in office entered its second half, McCreevy decided to throw caution to the wind in an effort aimed at securing Fianna Fáil’s re-election. The change in tack and the expansionary effects of the change soon prompted concern in the European Commission and the European Central Bank.

Ireland’s spectacular economic growth in the mid-1990s was all the more impressive in that it had not led to a sharp rise in inflation. In 1997 inflation was 1.5 per cent. The following year it was 2.4 per cent, and the following year again 1.6 per cent. However, in 2000 it jumped to 5.6 per cent, and it fell by less than one percentage point in the following year. This was a very serious issue, since inflation levels that were persistently higher than those in the
EU
generally meant that Ireland was becoming a relatively expensive country—a disaster for an economy that depended on exports to pay its way in the world.

It was also an issue of general concern for the European Commission. In February 2000 the Commissioner for Economic and Monetary Affairs, Pedro Solbes, came to Dublin, where he met McCreevy to discuss the Commission’s view that the Government should not go ahead with its intended tax cuts and pay increases. Solbes met other political leaders and spoke at the Institute of European Affairs. His message was clear: the Irish economy was overheating, and the Government’s plan for further tax reductions would further stoke demand.

The debate rumbled on, with McCreevy and Harney in particular objecting to the Commission’s views on Ireland’s economic management. When, in December 2000, McCreevy announced another giveaway budget, the concern in Brussels mounted all the more. Irish officials who attended a meeting of senior
EU
civil servants in Brussels in mid-January 2001 were taken aback at the intensity of the criticism levelled against them. On 24 January the Commission ‘sanctioned’ Ireland—the first time a country had been singled out in this way. Quinn said McCreevy was stoking inflation.

Minister McCreevy is in effect damned by his own figures. On Budget Day 2000 he announced a tax package of £942 million against a backdrop of inflation between 2 and 3 per cent. On Budget Day 2001 he announced a package of £1.2 billion against a backdrop of 7 per cent inflation. In the interim Minister McCreevy engaged in a campaign of vitriol against anybody who dared suggest we faced a significant inflationary threat, and that included the European Commission. This has come home to roost.

In general, however, Ireland appeared to be underwhelmed by the reprimand and the
EU
warning on economic policy. The
Irish Times
, in an editorial of 25 January 2001, said the Commission must recognise that the Irish economy has been the best-performing economy in the
EU
, by a distance, for some years. Ireland had a strong budget surplus and a sharply reducing ratio of national debt to
GDP
. The main cause of inflation was not budgetary policy but the weakness of the euro and the increase in oil prices in 2000. Greater demand in the domestic economy was only part of the picture.

The editorial also said that the initial draft of the Commission’s reprimand, which suggested that the Government take corrective action by increasing taxes or reducing spending, was not likely to form part of the text that would be discussed by a coming meeting of finance ministers. David Byrne had intervened, as had others, to have the wording changed. Significant reversals in the budget tax cuts would be politically impossible, and there was a strong case for continuing to increase spending in order to improve public services and to invest in key infrastructure projects.

The editorial was certainly in line with the public mood. An opinion poll published in the
Irish Times
on 26 January showed that the Government had received a substantial boost from the budget and had enough support to be returned to power in the next general election. Satisfaction with the Government was up 15 points, to 58 per cent, while dissatisfaction was down 11 points, to 35 per cent. The ratings for Ahern, Harney, Fianna Fáil and the
PD
s all increased. Fine Gael, on the other hand, was down 4 points, to 20 per cent, while John Bruton, at 37 per cent, scored his lowest personal satisfaction rating since November 1994.

The political correspondent Mark Brennock reported that the opinion poll

gives a substantial personal boost to the Minister for Finance, McCreevy, showing an overwhelming popular endorsement of the budget. The poll found that 71 per cent believed it was good for the country, 15 per cent believed it was bad for the country, and 14 per cent expressed no opinion. The poll was taken after it had been reported that the Commission was to censure the government for an inflationary budget.

The budgetary strategy being pursued by McCreevy was proving to be a political success. Perhaps it emboldened him. On the day the opinion poll was published, McCreevy, who was addressing a meeting of the Financial Services Industry Association, said Ireland’s European critics were jealous of its economic success. The Commission’s censure proposal was to be discussed at a meeting in February with his
EU
finance minister colleagues, but he would not be changing his budget, irrespective of what they said. He said Ireland’s success in attracting foreign direct investment, through its low corporation tax regime, was a particular bone of contention for other member-states. ‘We have no friends in Brussels regarding our corporation tax regime or in any
EU
capital, and this is creating the background music for what we are hearing now.’ Green-eyed jealousy lay behind the criticisms that were coming from Brussels, McCreevy contended. ‘The
EU
would like me to take money out of the Irish economy. It wants me to take a couple of hundred million pounds out of tax reductions and expenditure, but there is no question of rewriting the budget.’ McCreevy said he was annoyed that the economy that had the highest European growth rate, the second-lowest national debt, a falling inflation rate and almost full employment was facing censure. Any censure by the
EU
would not be binding, because budgets were a matter for individual member-states to frame according to economic circumstances.

In early February the Brussels correspondent of the
Irish Times
, Denis Staunton, reported that diplomats there were warning that if McCreevy, in rejecting the Commission’s criticism, was too strident, it would antagonise Ireland’s
EU
partners. ‘Within the complex political environment of the
EU
, small member-states such as Ireland depend on the goodwill of other states to achieve national objectives.’
EU
officials had responded with derision to McCreevy’s suggestion that his European critics were motivated by envy, Staunton said.

The strong public reaction against the advice of Brussels sparked concern there. The process that had been put in train began with the Commission but would culminate in the meeting of the
EU
finance ministers, which would make the final decision in relation to any rebuke. Lobbying by Byrne and others, as well as concern in Brussels about stoking anti-
EU
sentiment in Ireland, led to demands for a reversal of the budget measures being changed to demands that restrictive measures be introduced during the course of the year. As the ministers’ meeting neared, Staunton reported that the Commission ‘has been surprised by the intensity of the public response in Ireland to its reprimand and is at pains to emphasise that its assessment of the Irish economy included praise as well as criticism.’

McCreevy met his fellow
EU
finance ministers on 12 February 2001. He remained defiant, but his remarks were met with silence. A formal recommendation criticising his December budget was adopted without a vote. No-one other than McCreevy spoke in Ireland’s favour. He told his fellow-ministers that the censure was unjustified. ‘Neither I nor the Government, and the majority of the economic commentators, believe that such a proposal is warranted. Nor is it, in my view, a proportionate or even-handed response.’ Not only did he defend his budget but he also said he would defy the unprecedented rebuke and introduce another giveaway package later in the year. He told journalists after the meeting that he wanted to ensure that his next three budgets would be as successful as the previous three. He did not believe that his defiant stance would damage Ireland politically within the
EU
. ‘Over the past five years we have received no favours or special treatment from the
EU
. What we got we’ve got on our merits.’

John Bruton wrote an extended piece on the row with Brussels in the wake of the rebuke. The fundamental difference between McCreevy and his
EU
finance minister colleagues, he wrote, was the European view that the Irish budget was ‘pro-cyclical’ and stoking inflation. While McCreevy responded to the Commission by saying that Ireland was producing large and prudent budget surpluses, and had measures to increase productivity and the labour supply, he did not, in Bruton’s view, address the Commission’s main concerns. ‘McCreevy does not controvert them. He simply ignores them.’

Bruton argued that perhaps McCreevy had some argument that, in the modern world, what with technological change and an increased understanding of markets, business cycles were no longer an issue; but, if he had, he had not voiced it.

If he did make such a contention he would have had to deal with the known fact that personal borrowing levels in Ireland are now at an unprecedented high level relative to personal incomes. He would also have to deal with the fact that recent rates of house-price increase have been higher than in any country which has escaped a subsequent house-price collapse.

The Government, he pointed out, had said ‘it will have to bring in up to 300,000 immigrants to meet foreseeable labour demand.’ McCreevy ‘would have had to say where these immigrants would be housed, given the existing housing shortage,’ if he was to deal frankly with the Commission’s concerns.

The director of the European Institute in
UCD
, Prof. Brigid Laffan, also made clear her concerns. She pointed out that McCreevy had been isolated at the meeting of European finance ministers. ‘His intervention was received by his fellow ministers with studied silence. Given that Ireland tends to position itself in the mainstream of most
EU
negotiations, was it wise of Ireland’s representative to opt for isolation on this issue?’ For Laffan, McCreevy, encouraged by Harney, had depleted scarce political capital with ‘nothing to show for it.’

The former Fine Gael Taoiseach Garret FitzGerald was a particularly strong critic of McCreevy’s and the
PD
s’ economic policy. The tensions that had been introduced into Ireland’s relationship with the European Commission and our
EU
partners were ‘unnecessary and dangerous’, he wrote in the wake of the meeting. Ireland’s position in the
EU
had been damaged by McCreevy’s budget and the way he had dealt with the Commission’s criticisms. The row raised questions about Ahern’s judgement both in his choice of ministers and in his execution of his co-ordinating role in the Government. McCreevy’s combination of certainty and a strong ideological streak made him a dangerous choice for the position of Minister for Finance—one that Fianna Fáil might in time regret.

He is an ideological
PD
rather than a Fianna Fáil pragmatist, and in a
FF
/
PD
government, which tends to be pulled dangerously to the right by the smaller party, there was bound to be a need for a counter-balance rather than to reinforce this pull in finance. There was also a danger in making the Minister for Finance a strong-minded accountant with a gambling streak: the minds of some accountants can at times be resistant to economic considerations, and this is clearly so with our minister, who seems to be unable to accept even such obvious economic concepts as the need to pursue counter-cyclical rather than pro-cyclical policies.

The 2000 budget involved a package of more than €1 billion in pay cuts and spending increases. An analysis by the Economic and Social Research Institute confirmed the opposition position that the budget was skewed in favour of the better off, though such an analysis was not something that was as politically damaging as perhaps it should have been.