IMF verdict on Ireland to disappoint euro-sceptics

Click to follow
The Independent Online

The Irish economy is to get an upbeat assessment from the International Monetary Fund in its annual 'Article IV' report, to be published this week.

The Irish economy is to get an upbeat assessment from the International Monetary Fund in its annual 'Article IV' report, to be published this week.

The IMF's economists dismiss the argument, often made by British euro-sceptics, that membership of the single currency has caused a damaging inflationary boom in Ireland that will end in recession. The report will say the economy is in very strong shape.

It will also say it is unlikely Ireland will suffer a property market crash, although it predicts growth is set to slow. However, it will urge the government to run a tighter fiscal policy to offset some of the stimulus due to low "one-size-fits-all" interest rates in the eurozone, echoing advice from the European Commission.

Separately, it emerged at the weekend that Siemens has been told by one of its financial advisers that the UK is most likely to join the euro in 2002, at an exchange rate of £0.68, equivalent to about DM2.88.

The internal report was prepared for Siemens, a significant investor in the UK, by State Street Bank. It admits there is a good deal of uncertainty about the UK's decision.

However, Avinash Persaud, the bank's highly-regarded currency analyst, says the most likely scenario is entry in early 2002 after a post-election referendum. A sustainable exchange rate would lie in the region £0.65-£0.70, the report says. This points to a depreciation of around 12 per cent from Friday's closing rate of £0.6042, less than many exporters would like. Mr Persaud writes that an even higher rate might be sustainable but could prove risky given the UK's disastrous experience with the a rate pegged too high in the Exchange Rate Mechanism.

European Central Bank Directorate member Tommaso Padoa-Schioppa says in an interview published today in Der Spiegel magazine that there is no logical basis for the euro's weakness.

"It is by definition difficult to give reasons for the euro's exchange rate development. Because if something isn't justified, then there obviously are no understandable reasons." he says.

The euro has declined by more than 20 per cent against the dollar since its launch in January 1999. The weakness of the currency has boosted inflationary pressures in the eurozone countries.

Although inflation in Ireland has topped 5 per cent, compared to an EU average of 1.7 per cent, a full percentage point is explained by big increases in tobacco tax late last year. When the tax hike drops out of the 12-month figure later this year, headline inflation will turn lower.

Many economists also believe higher than average inflation, especially in property markets and the service sector, should be expected in the eurozone's "peripheral" countries such as Ireland, Spain and Portugal. The reason is that price levels started out lower in these countries than elsewhere but will converge rapidly as living standards catch up with those in the core countries such as France and Germany.

Living standards in Ireland, measured by GDP per head at long-run exchange rates, have now overtaken the UK level.