Duisenberg's stern inflation warning was a damp squib

Those who were not there to witness the event first hand might now have the wrong impression. They might have thought that the "stern warning" on Irish inflation delivered by Mr Wim Duisenberg at the Financial Services Industry Association annual dinner recently would have produced sharp intakes of breath, a frantic media scrum, consternation behind official closed doors, market traders screaming orders into mobile phones and other such cliched behavioural responses.

The curious thing is that the event passed almost unnoticed at the time, certainly judging by the diners, who didn't blink a poker eyelid at the disapproving mention of "pro-cyclical fiscal policy".

Many had heard it before from the European Central Bank, of course. It was sort of noticeable in a "no news" way that nothing happened to Irish stocks either. Not a tick, upwards or downwards, was ascribed to the remarks from the ECB president. Writing afterwards in this newspaper, Dr Dan McLaughlin of ABN Amro stockbrokers asked how people would view the chairman of the Federal Reserve, Mr Alan Greenspan, giving out to Rhode Island about its "domestic" inflation rate, a matter of equally low significance for US inflation as the Irish rate is for the euro zone.

Another stockbroker and I mused on a separate track. Imagine if the speaker at the Financial Services Industry Association dinner had been Mr Greenspan instead of Mr Duisenberg. Imagine he had delivered the exact same speech. The Irish equity market could, would, have been walloped. Maybe there's the solution to the troubles of Irish companies battling against a scepticism about the Irish economy: invite Mr Greenspan to the next association dinner.

To be serious, there is a discernible element of Mr Duisenberg being scapegoated for the euro's woes. A heroes and villains analysis of central bankers is obviously superficial. The market-moving weight Mr Greenspan enjoys arises not alone from his judgments and the Fed's longer track record, but from very different institutional and policy contexts in the US.

The message Mr Duisenberg delivered here was not remarkable, new, or directly prescriptive. There was a much wider issue in play to do with Ireland's standing in Europe and the political battle over the euro project.

We have always told ourselves here that we have been "good Europeans", cynically some say, while we were looking for ever-greater support from the EU. Now, the tide is turning. We are set to become a net contributor to the EU budget.

Right now, the inflation difference between Ireland and the rest of the EU is being seized upon as evidence of the failure of the euro project, particularly by British eurosceptics. This is why Irish inflation matters most to EU policymakers - because, as Dr McLaughlin's Rhode Island example illustrated, Ireland matters little for euro-zone inflation itself. Rather, the political enemies of the euro project find some very convenient, if superficial and flawed, ammunition in the Irish statistics.

It would, in these circumstances, do euro-zone policymakers in the ECB and EU Commission a favour if Irish inflation were to fall back towards the euro zone average. The problem for us is how to engineer this, economically and politically. We can't do it on either ground in the short term, and it's therefore not worth trying. We simply cannot perform this favour for our EU partners. There will have to be other ways to be supportive about the euro project, and to continue to be good Europeans.

The worry about needless ammunition being given to opponents of the euro from the Irish inflation experience might also explain why Mr Duisenberg chose to devote a large part of his speech to circumstances where inflation differences between euro-zone states don't actually matter much. Many of those circumstances could be said to apply to Ireland. So he had a double-edged message: most importantly, I'd say, was the one aimed at the eurosceptics about inflation differentials to the effect that inflation differences, Ireland's included, don't prove the euro is a bad project. Second, would Ireland please do whatever it can, anyway, to avoid giving needless ammunition to eurosceptics. It is worth the while of the president of the European Central Bank to be seen to pressurise a euro-zone economy that has inflation out of step, so that when the time comes for a larger country, such as Italy, the same admonition might be given.

I don't want to exaggerate the importance of one speech of the president of the European Central Bank. As ever, we would do well to try to see the wider context in which our large neighbours and partners comment on our situation.

There are much bigger fish than Irish budgetary policy for Mr Duisenberg, the EU Commission and EU governments to fry. Principal among them is the success of the euro project and the entry of the sterling into the system.

Oliver O'Connor is contributing editor at Finance and Finance Dublin.

e-mail: ooconnor@indigo.ie