"Dilemma" of pound's relationship to EMU, sterling stressed

THE Irish authorities may well face a dilemma over the relationship of the pound with the deutschmark and sterling, according to Mr Philip Halpin, head of treasury and international with National Irish Bank.

Speaking at the Institute of Bankers Dublin region yesterday, Mr Halpin said the desire to participate fully in EMU and the necessity of maintaining a competitive position against sterling were contradictory.

"The Irish authorities' position with respect to the Maastricht criteria is quite clear on inflation interest rates and the public finance, but I believe our performance against the mark is problematic, as our level has been too low and performance too volatile at times over the last 14 months."

He warned that with sterling trading at DM2.26, if the pound were to rise to DM2.37, or 1.25 pfennigs above the bottom of the old narrow ERM band, the pound would rise to £1.05 against sterling. The solution would be a strengthening of sterling against the deutschmark, he added.

"This would allow us to maintain a much more credible position against the German currency while not suffering any further erosion of our competitiveness."

He noted that the gap between Irish and German three month money is around 1.8 per cent. "This is because of our dependence on Britain and will be difficult to close," he added.

Mr Halpin concluded that Irish wholesale interest rates, at close to 5 per cent, are likely to remain stable over most of this year, before beginning to creep back up towards the end of 1996. "It is when interest rates begin to rise that Irish economic performance will begin to deteriorate," Mr Halpin predicted.

As the debate on EMU intensified, the head of research in Ireland's largest union, SIPTU, has said the target date for locking currencies, now 1999, should be deferred for a year.

Mr Manus O'Riordan, SIPTU's head of research, told a meeting of the James Connolly Education Trust earlier this week that the Government had failed "to speak out decisively" on the debate over EMU "in such a way as to maximise gains and minimise losses".

"Indeed, the Irish Government's passivity in the face of British Tory attempts to derail EMU is truly astonishing. They are not trying to sabotage the project, the Minister for Finance, Mr Quinn, pleaded last week on their behalf," Mr O'Riordan said.

"But surely Britain's opposition to setting up the necessary mechanisms for ensuring its adherence to its own treaty obligations is nothing short of an act of Tory sabotage.

He said that, even if Britain remained outside the EMU, the Government should be reminding London that "competitive devaluations of any member state's currency, including sterling, are deemed to be in violation of Maastricht Treaty obligations".

There were two strong arguments for deferring the EMU project, Mr O'Riordan said. He believed that a deferral could see a Labour government in power in Britain, with a radical shift in policy in this area.

"But there is yet another strong argument emerging for deferral in the interests of the EMU project itself. This argument is in the interests of ensuring strong European economic recovery and, consequently, in the interests of maintaining high rates of economic growth in Ireland itself, which is so vital in tackling our problems of mass unemployment."

A deferral might also allow France and Germany to meet the convergence criteria more easily, he said.