EU group says Ireland is a role model for states adopting euro

Ireland is a role model for new EU member states that hope to succeed in adopting the euro as their currency, says an influential European think-tank.

But the Breugel Institute - a Brussels based group of economists backed by European governments and international corporations - warns that economic growth rates in some euro zone members have persistently underperformed because the tests for them to enter to the euro were too lenient.

In its latest policy brief "The euro: Only for the Agile", the institute says that the euro zone will expand from its present 12 members states to 19 by the end of this decade.

The report says that in spite of a rising cost of living, Ireland's productivity and flexibility has ensured its economic success: "In Ireland, real exchange rate appreciation has been offset by rapid advances in productivity and movements up the value chain in the trade goods sector. As a result, Ireland's competitiveness has not suffered, as witnessed by the boom in exports."

The report singles out Portugal, Italy and Spain as countries where rising costs have not been matched by greater productivity. "The lack of structural transformation has left both countries vulnerable to competition from low-cost producers, especially China and the new EU member states. Italy and Portugal entered EMU with industrial structures that placed them directly in China's line of fire," the report says.

Dr Alan Ahearne, research fellow of the Breugel Institute and head of the Finance Centre at NUI Galway, said that criteria for entering the single currency should aim "to admit more Irelands and not more Portugals". "Portugal and Italy face painful adjustments in the future to restore competitiveness, while Greece and Spain may soon find themselves with similar problems.

"As regards euro area enlargement, European policymakers should apply more sophisticated entry criteria than in the past," Dr Ahearne said.

The report argues that EMU candidates should be assessed on how flexible their wage formation processes are, how competitive their product markets are and on how prudent their controls on private sector lending are.

"The euro area should avoid putting itself in a situation where its members pursue inconsistent goals," it adds.