This week the Organisation for Economic Co-operation and Development (OECD) forecast that the Irish economy had reached its peak and would slow down gradually over the next few years. In large part, this is due to the constraint imposed by labour shortages, and higher wage demands leading to a loss of competitiveness.

How realistic is this soft-landing scenario? There is a strong possibility of a hard landing, which involves the economy expanding even faster in 2001, followed by an abrupt about-turn and possibly recession. Since 1994, the Irish economy has been operating well above its natural or potential growth path. Initially this was facilitated by high levels of unemployment, which enabled firms to increase output while leaving prices unchanged. With the advent of full employment in 2000, all this has changed.

The continuing growth in the economy is more and more being translated into inflationary wage pressure, particularly in the services sector.

This gives rise to the question of how the Irish economy will adjust to a more sustainable growth path? The prognosis, unfortunately, is not as good as that painted by the OECD.

The main difficulty relates to the constraints imposed by EMU membership. An independent Central Bank of Ireland would by now have cut the growth in the money supply and domestic credit and raised interest rates and the exchange rate. While a soft landing could not be guaranteed, this deflationary monetary policy would undoubtedly have slowed the economy and dampened inflationary pressure.

Inside EMU, the Central Bank is helpless. Money supply and domestic credit are rising by 25 per cent and 35 per cent. Inter-bank interest rates, adjusted for inflation, are negative and the real exchange rate of the Irish pound has depreciated by 7 per cent against sterling and by 14 per cent against the dollar since the euro was launched.

Hence, the money supply, interest rates and the exchange rate are all working in the opposite direction to what is required. Monetary policy is providing an unwelcome stimulus at the wrong time. The second problem relates to inappropriate wage and fiscal policy. As emphasised by the OECD, the fall in unemployment and the continued growth in the demand for labour should increase wage rates, thereby eroding competitiveness and slowing down the economy.

This is a desirable development as nominal wages should rise to restore the real wage consistent with full employment.

Unfortunately, in the Programme for Prosperity and Fairness (PPF), the Irish trade unions signed up to a completely inappropriate wage agreement. Not for the first time, they underestimated inflation, thereby securing a cut in real earnings for their membership.

Once productivity gains and the decline in the euro are included in the calculation, the labour cost of producing a unit of output in Ireland has declined by 18 per cent relative to other countries since 1998.

As in the situation with the monetary case, the adjustment mechanism in the labour market is not working in the desired direction. Irish labour is getting more, not less, competitive.

To make matters worse, the PPF commits the Government to expansionary tax cuts in the Budget next month. This is on top of a 13 per cent increase in Government spending announced in the Estimates last week. Obviously, fiscal policy cannot be relied on to move the economy to a more sustainable growth path.

Labour mobility is another important adjustment mechanism for a country in a monetary union, as immigration should act to ease the labour shortages. While net immigration to Ireland is now the highest in the European Union, differences in language and culture, the cost of housing and ethnic discrimination will continue to act as a constraint.

The fall-back for the euro enthusiasts is the contention that, in a monetary union, inflation rates in member-states will converge. But even the European Central Bank has been at pains in its bulletins to emphasise that inflation differentials can persist in the euro-zone for some considerable time.

While it is undoubtedly true that, in the long run, Irish inflation is not likely to diverge significantly from the EMU average, the Irish authorities cannot rely on a crude version of uniform inflation to get them out of their predicament. Overall, a combination of bad economic policies and the rigidities imposed by EMU membership are causing the Irish economy to expand rather than contract back to its natural growth path. Contrary to the OECD's forecast, there is a realistic possibility that the boom will continue, possibly to the end of next year, followed by a sharp downturn as the economy runs out of people, space and management ability.

There does not appear to be any adjustment mechanism at work to ensure the soft landing envisaged by the OECD. How sharp the downturn will be, if it comes at all, is impossible to say. As long as the US economy keeps growing, the downturn is unlikely to turn into a genuine slump involving falling house prices, disappearing consumer confidence and rising unemployment.

Can anything be done domestically to avoid a hard landing? The PPF should certainly be abandoned as it is only introducing rigidities into the labour market. It should be replaced by an agreement that contains provisions for adjusting to inflation and other external developments.

It is now nearly two years since Ireland joined EMU. Another year or so of industrial strife and worsening infrastructure bottlenecks and the costs of surrendering the State's economic independence to the European Central Bank will become all to apparent.

Dr Anthony Leddin is senior lecturer in economics at the University of Limerick.