Economy open to major shocks within the EMU

THE Irish economy is open to major shocks as a result of participation in EU Economic and Monetary Union, according to Mr Gerry Keenan, investment director with Irish Life. Participation in EMU would involve surrendering not only sovereignty over monetary policy but also to a great degree over fiscal policy, he told the Irish Association of Pension Funds' annual conference in Dublin yesterday.

Sterling would not be one of the initial entrants to EMU, he said. One of the conditions for acceptance was participation in the ERM for two years prior to the start up date, but sterling would certainly not be put into the ERM this side of the British general election. If sterling was unstable and Ireland joined with the first group, then "our real economy is wide open to major shocks", he said.

However, membership of the ERM would lower long term Irish interest rates, probably by one percentage point, according to Mr Keenan. "If you believe we're going in at the beginning, buy Irish bonds," he said.

Pension funds would also benefit from wider access to investment markets without exchange rate risk. Irish pension funds would be likely to diversify and hold fewer Irish equities but overseas institutions would, in turn, be more prominent in the Irish market.

Mr Tom Ross, chairman of the British National Association of Pension Funds, told the conference that the emerging consensus was that universal pay as you go state pension systems were unsustainable. "The state's role should be to target benefits on those unable to provide for themselves," he said. "In future, the bulk of most people's pensions should come from funded schemes, encouraged by a tax regime which exempts contributions and investment income but taxes emerging benefits."