Inflation dogs Celtic Tiger

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The Independent Online
IRELAND, whose place as a founding member of the single currency will be confirmed tomorrow, will be the litmus test for Britain's decision on joining, many economists believe.

The dilemmas now faced by the Irish also provide a good example of how divergences in the economic make-up of the single currency zone could make the project deeply unpopular to implement.

Unlike Britain, Ireland has never been through the political convulsions on Europe which tore apart the Tories.

A Euro-friendly electorate and a political consensus on monetary union led the government to decide some years ago that with or without the United Kingdom, the Republic's biggest trading partner, Ireland's place was on the inside.

Ireland meets all the qualifying criteria laid down by the Maastricht treaty thanks to sound management of the finances, industrial peace and a booming economy which is out of step with the Continent.

It is one of the few candidate countries to have achieved a budgetary surplus. Yet high growth and the creeping inflation which has come on the tail of the Celtic Tiger is already bringing Ireland into conflict with its Euro-zone partners.

Come January 1999 Ireland's interest rates will have to be cut to German levels. Yet this is the last thing Ireland needs when by the end of next year it will have the highest inflation in the EU after Greece.

The Irish authorities got the first taste of life post-euro last month when the government came under pressure to revalue the punt and was then ordered to take immediate action to tackle inflation.

In practice this means that at a time when spiralling house prices are fuelling demands from teachers and nurses for wage increases and cuts to ease the burden of income tax, the government is being told to freeze spending and put tax cuts on hold in the interests of the stability underpinning the euro.

Different economic structures, cultures and historical legacies are cause for immense concern throughout the euro area in light of the one- size-fits-all monetary policy about to be imposed.

How will vast swathes of the continent respond in the same way to the same economic medicine when such differences in things like pay, social security, demography, and labour market regulation persist?

For the Brussels planners, the answer is that a federal monetary policy will help to iron out the boom and bust cyclical movements while closer coordination on tax and spending will operate in parallel.

And we are seeing signs that the prospect of Emu is having an electro- shock effect on the most entrenched economies, forcing governments and companies in France, Belgium and Germany to adopt the "Anglo-Saxon" style hire-and-fire labour model which Britain and Ireland have already embraced.