Ireland must continue to steadfastly meet its bail-out targets to minimise the major risks posed by adverse developments in the euro area, the European Commission said today.
Ireland is halfway through its 3 year, €85 billion EU/IMF bailout programme.
The EU said that on top of progress made to date, available information suggested it was broadly on track to meet the demands of future quarterly reviews.
However, the country's plans for an export-led recovery are in question due to a slowdown in its trading partners.
With the Commission predicting economic growth slowing to 0.5% this year from 0.7% in 2011, it cautioned that major challenges lay ahead.
"Key risks in the period ahead relate to the adverse external environment and in particular the risk of unfavourable developments in the euro area," the Commission said in its annual set of policy recommendations to member states.
"To minimise vulnerability, it is essential that the programme continue to be steadfastly implemented,'' it added.
It said other risks included increasing related challenges to bank deleveraging and funding, the complex nature of the reorganisation of the financial sector and possible budgetary pressure should economic activity prove weaker than anticipated.
The OECD gave a similar prognosis last week when it said Ireland's slow recovery should gain further momentum next year but risked being derailed by the fallout from the euro zone's sovereign debt crisis.
While noting that the recapitalisation of Ireland's banks has been mostly completed and that deleveraging targets were exceeded in 2011, the Commission said more work needed to be done.
"It is essential to further develop the financial sector strategy to underpin the viability of domestic banks, with a view to improving prospects for their timely return to market funding and, ultimately, private ownership," the report said.
It added that structural reforms to improve competitiveness and create more jobs were significantly advanced, and sheltered sectors of the economy were being opened up.