State role in European economies must be questioned

Ireland enters EMU on January 1st next with arguably a more healthy economy than any of the other members of the euro bloc have experienced since they joined the European Community.

In a sense, Irish growth is a more mature phenomenon with the 11 per cent expansion this year spread across many sectors of the economy. Consumer spending has boomed at near 10 per cent, growth in investment is well into double figures and exports and imports are up by 20 per cent or more. This clearly is an economy performing at exceptional levels of activity.

The Quarterly National Household Survey published by the Central Statistics Office earlier this week points to a massive increase in employment in the year ending in the second quarter of 1998, far beyond our own estimates and to my knowledge those of any other forecaster.

There was an increase in the labour force of some 62,000 and a fall in unemployment of 32,000. While this, on the one hand, confirms the reality that the Irish economy is enjoying a period of unprecedented boom, on the other hand, it is clear that this pace of expansion in employment cannot be sustained indefinitely.

The euro bloc by contrast is growing by 3 per cent, a little more rapidly than the European Union as a whole. The most buoyant economies next to Ireland's are Finland with a 5 per cent growth and Portugal and Luxembourg with more than 4 per cent growth.

The large countries in the euro bloc are still just managing to hold their government borrowing requirements within the Maastricht guidelines in contrast with Ireland's very comfortable surpluses.

Average unemployment in the euro bloc is 11 per cent, only a slight improvement on its peak rate of near to 12 per cent in 1996. Ireland by contrast has a rate that has rapidly fallen below 8 per cent and is well placed to beat the Government's target of 7 per cent by 2002.

The relative size and role of state involvement in European economies needs to be seriously questioned. Ireland's recent success in employment terms is as much about flexibilities which are present here by contrast with the over-regulated European model.

Public spending ratios significantly above 50 per cent of GDP act as a brake to business and employment expansion.

There are no certainties as to how monetary union will work in practice. We do know that the European Central Bank will do all in its power to ensure price stability. There are developing political pressures which appear to be promoting economic growth via the Government's purse, which is unlikely to be in Europe's best long-term interest. Hopefully, the European Central Bank will counter any inflationary tendencies that may be induced by the new political line-up in Europe.

The trick now for Ireland is to position the economy in this new euro regime with the ability to move to a more sustainable but healthy rate of growth in the medium term. We will probably not be helped in the immediate future by the likely further fall in euro interest rates in the first half of next year. This will tend to fuel excess demand particularly in the housing sector.

One of our more immediate needs is to tackle infrastructure bottlenecks, which are threatening to undermine seriously our competitive position.

Ireland's capital stock is far below European standards. These inadequacies are driving up the cost of housing and therefore the cost of labour. It is also becoming an impediment to attracting skilled labour back to Ireland from abroad.

Inadequate infrastructure also more directly undermines competitiveness because of the protracted time and therefore cost it takes to transport goods, services and people around our inadequate transport infrastructure.

These must be key priorities over the next few years, in order to maintain Ireland as an attractive place to invest and equally importantly, to live.

There is still huge potential to reduce long-term unemployment by giving appropriate training opportunities to people clearly linked to the jobs market. We should ensure that the ethos that everyone who can work does work is reinforced both at the level of the individual and also within those agencies dealing with unemployment and job placement.

Within monetary union we have to be capable of adapting to a business climate that will be determined even more than today by conditions outside our control. Ireland and the EU must resist pressures to "level upwards" the cost and tax base of business through direct and indirect state involvement.

If we prove to be inflexible the virtuous circle of growth in incomes and employment that we have enjoyed most demonstrably in the last five years will go into reverse and the inevitable focus of such a reversal would be on unemployment.

In today's globally competitive environment no country can afford the luxury of wasted resources; more importantly, Ireland does not want to return to the defeatism of high unemployment.

Our efforts in the next year then will be aimed at ensuring we tackle these issues and that in any negotiations following Partnership 2000, we ensure that Ireland continues to be a top performer within the new euro regime.

David Croughan is chief economist at the Irish Business and Employers Confederation.