Outstanding Irish economy praised by ECB economist

Irish politicians have been getting economic decisions right and as a result the performance of the economy in recent years has been without precedent, the chief economist of the European Central Bank said last night.

However, Mr Otmar Issing warned that a turning point had been reached and it was very important that these achievements were not squandered by excessive wage rises.

Addressing a meeting of the Institute of European Affairs in Dublin last night, he said Irish policy-makers were being rewarded for past decisions.

"The fruits which were sown over 10 years ago are now being reaped and should not be endangered," he said.

"Many governments in Continental Europe could take a leaf out of the Irish book - specifically on reforms."

However, he cautioned that there was a need to guard against complacency as the economy entered uncharted waters.

"There is a threat from an increasing shortage of skilled labour, bottlenecks in transport infrastructure and escalating house prices," he said. The relative under-performance of the Irish stock market this year may be attributable to these factors, he said.

But specifically, he said, there was a risk that the growth in productivity would fall behind wage rises. By continuing to choose the correct instruments, however, there was no reason that Ireland should not continue to outperform Europe in non-inflationary growth terms for years to come.

Mr Issing, who is considered to be one of the most influential ECB executive board members, did not give any clear indication of the timing of its next rise in interest rates, although he confirmed that the ECB was very aware of the risk which the large growth in credit posed for euro-zone inflation.

"Looking at the risk of inflation is a continuous process and the balance of risk has changed. Our concern for the risks has increased as they continue to be on the upside."

Money supply and credit growth appear to be increasingly worrying the ECB. In the bank's monthly bulletin, released yesterday, it said it was looking at these indicators with "great vigilance". According to Mr Issing, the continuous rise in money supply since March could not be attributed to the changeover to the new currency and was a concern when combined with "very, very high credit growth" to the private sector.

Mr Issing noted that rising commodity prices would have a much bigger impact on inflation as the world economy picked up.

"The influence of the exchange-rate level is also greater if commodity prices pick up. The price increases would be in dollar terms and a weaker currency would mean a double impact."

He pointed out that growth prospects were now considerably rosier for the euro zone. And if growth were sustained, it would give the ECB a chance to raise rates, which were cut in response to very depressed growth numbers across the world earlier this year. "In July we were optimistic that growth would pick up in the second half of this year, but now we are more or less certain that the second half of this year will bring substantially higher growth across the euro zone and this will create a momentum that will continue into next year."

Asked about the likelihood of the UK participating in the euro, Mr Issing simply said that it was up to the Britain. The ECB was not campaigning for it to join, although sterling had the same weight as the dollar in trade-weighted terms.