The European Central Bank is pressing the Government to cut public sector pay in the budget next December and accelerate its austerity drive.
The Frankfurt-based institution wants social welfare entitlements reviewed and is also calling for greater efforts to facilitate pay cuts in private employment contracts.
Interviewed by The Irish Times, ECB executive board member Jürgen Stark said the Government should capitalise on improving market sentiment towards Ireland by "frontloading" cuts outlined in the EU- IMF bailout plan.
Mr Stark resigned his position on Friday, but remains on the bank's board until his successor is appointed. Germany has nominated deputy finance minister Jörg Asmussen to replace him.
His departure, for "personal reasons", is widely held to reflect his growing unhappiness at the ECB's purchase of sovereign bonds.
However, his views on Ireland represent the position of the ECB. The ECB is a member of the EU- IMF "troika" that is overseeing Ireland's bailout programme.
Mr Stark, the top German official in the ECB, argues that public sector pay in Ireland is too high by euro zone standards and should be cut to help restore order to the country's public finances.
Any such move would bring down the Croke Park deal, which obliges the Government not to cut public pay. However, Mr Stark says the Government should consider from a political point of view that civil service pay in many of the countries supporting the Irish bailout is considerably lower than in Ireland.
"Together with Greece, Ireland is still ranking top," he says. "This needs to be corrected." The ECB wants the Government to begin cutting pay in the 2012 budget and to continue in 2013.
Mr Stark says the Fine Gael-Labour Coalition has the benefit of a very strong mandate from the electorate and should take advantage of that to adopt a tougher deficit-cutting target in the 2012 budget.
"I think the Irish Government has the chance to surprise the market positively," he says.
"We know that after a certain period of time there is always a risk of reform fatigue. The Government should be even more ambitious in cutting the public deficit ratio, which is still at double-digit level."
Although he insists it is not for him as a central banker to call for social welfare cuts, he says entitlements should be examined.
He says reform of the welfare state is an issue throughout the euro zone and argues the need for adjustments to pension, health and unemployment benefit schemes is obvious. "They have to be under scrutiny."
He welcomes moves to reform the wage-setting system in the private sector, but says the Government should go further to facilitate measures that would allow pay to be cut.
"One issue that was addressed by the troika is downward wage flexibility in Irish employment contracts. Some progress has been made. However, this is a field in which there is also scope to be more ambitious."
He is dismissive of a renewed Government push to avoid repaying about €3.8 billion of the senior debt in Anglo Irish Bank and Irish Nationwide Building Society.
The ECB remains opposed to such an initiative and Mr Stark says Ireland is "not autonomous to take this decision". The question is a "non-issue" for the bank.
Mr Stark, speaking less than four hours before the ECB made his resignation public, gave no indication that he had been considering his position or had problems with any of the bank's policies.
In spite of his reservations about the ECB bond-buying scheme, he describes as "absurd" and "inappropriate" political claims in Germany that the initiative has reduced the ECB to a pan-European bad bank.
Mr Stark's resignation drove down the value of the euro on Friday. Hopes that that turmoil will abate today may be undermined by increasingly open discussion in Berlin of a possible Greek default.
"To stabilise the euro, there can no longer be any taboos and that includes, if necessary, an orderly bankruptcy of Greece," said Phillip Rösler, German economics minister and leader of chancellor Angela Merkel's junior coalition partner, the Free Democrats.