The Day-To-Day of a Dm

1. Introduction

Maintaining strong budgetary control is a critical requirement, not just for small businesses but for the largest nations and economic unions throughout the world. In the Eurozone, several countries are encountering serious and prolonged economic and budgetary challenges, which has impacted their ability to sustain investor confidence, raise money on the bond markets and regain control of their finances. At Eurozone level, this has also impacted the value of the Euro and the equity markets.

In recent times, Ireland has been impacted significantly by two seismic events which has steered it into a budgetary tailspin; the deterioration of its economy as a result of the hard landing from the housing boom and the recapitalisation of its banking system. The Irish Government recognises the importance of strong budgetary discipline and while it anticipates a deficit of 10% of GDP for 2011, according to the Department of Finance's submission to Eurostat in September 2011, it is continuing its austerity programme with an overall target of a balanced and sustainable budget post 2015.

This paper will initially provide a brief historical background and structure of the common currency within the Eurozone and the rationale for maintaining strong fiscal discipline. The advantages of a balanced budget (or small deficit) will be put forward, together with its potential limitations and this will be framed within the Irish context. Historical background and structure of the common currency in the Eurozone:

The first moves towards a European monetary union took place in the late 1960s, and led to the production in 1970 of the Werner Report. This Report called for a European monetary union based on economic convergence, but at its institutional heart, a central bank modelled on the US Federal Reserve. The Maastricht Treaty ("Maastricht") was signed in 1992 with Economic and Monetary Union announced as a key objective of the European Union. The system of governance for the Eurozone envisaged in Maastricht included an independent European Central Bank ("ECB") at its core, charged as its over-riding objective to maintain price stability.

In 1997, the Stability and Growth Pact ("SGP" or the "Pact") was agreed which added a further important element to the Eurozone's governance. The foundation for the pact was the Optimal Currency Area theory of the early 1960's.This Pact was built on the Maastricht convergence criteria for EMU entry, in particular the undertaking of the Eurozone countries to maintain their public sector deficits below 3% of GDP. In 2005 the Pact was revisited which provided a more flexible approach, particularly in times of negative growth. In this case a progressive reversion back to below the 3% of GDP threshold was allowed.

In January 1999, the euro single currency was adopted by 11 EU countries

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