Warning on risk to Irish economy

There is a risk that the Irish boom could turn to "bust" following monetary union, a leading economist said here yesterday.

The advent of the single currency will increase the flow of capital into Ireland, because of the strong growth rate and the elimination of exchange rate risk, according to Professor Paul de Grauwe from the Catholic University of Louvain in Belgium and the Centre for Economic Policy Research in London.

The risk is that Irish banks will then increase their own lending in response to the increased competition and encouraged by ever increasing asset prices. The Irish banks will also have a cheap source of funds, because they will be able to borrow at the same rate as banks in Germany.

But according to Professor de Grauwe, who was speaking to the Irish Times after addressing a seminar, after the boom inevitably comes the "bust", when asset prices will fall sharply, potentially creating difficulties in the Irish banking sector.

In a wide ranging debate on the euro, several potential problems were highlighted by speakers, including the likely negative impact on unemployment, the possibility of an Asian-style collapse and the likelihood of a large number of takeovers and mergers within the European banking system.

However, positive points were seen as increased high-skilled em- ployment, greater benefits for consumers in terms of lower prices and more goods.

Mr Ernst-Moritz-Lipp, a director of Dresdner Bank, pointed out that the single currency is only one aspect of the greater issue of globalisation. "The great social debate of the next decade will be con- ducted back and forth between globalisation on the one hand and national identity on the other," he said.