Irish test for Emu
Ireland’s high inflation, say eurosceptics, shows that Emu is a failure. Without higher interest rates, the boom will shortly turn to a bust, they argue. Emu supporters recognize the problem but think a soft landing is still possible. The outcome may have profound consequences for Europe. An Irish crisis could hasten the arrival of a common economic government in the eurozone. It clearly shows the dangers of tying export-led tiger economies, such as Ireland, to mature restructuring economies, such as Germany. But in the end, the failure to raise productivity may be more crucial to Ireland’s future than its euro difficulties, reports Brian Caplen
European Central Bank president Wim Duisenberg, now being criticized around Europe for undermining the euro, would certainly not win a popularity contest in Ireland. With a booming economy and inflation of over 6%, Ireland badly needs an interest rate hike to slow things down. But when Duisenberg breezed in and out of Dublin in September he made it clear that Irish inflation was an Irish problem and there was no room for further debate.
Members of the Financial services industry association who heard Duisenberg read a prepared text on the whys and wherefores of inflation were less than impressed. A correct interpretation of the Irish predicament could be life-saving for policymakers everywhere. And even though Ireland accounts for only 1% of eurozone GDP, a prolonged crisis or collapse would have serious implications for the future of the beleaguered euro.
But the Duisenberg line is that the ECB bears no responsibility for Irish inflation despite the fact that Ireland's membership of European monetary and economic union (Emu) means that it has effectively handed over monetary control to Frankfurt. "The single monetary policy can only be geared towards the objective of price stability for the euro area as a whole," he told the Irish.