Outside the exceptional conditions of recovery from wartime destruction, I do not think that any European country has had the opportunity of such rapid economic and social progress as is now open to the people of this State. If we can avoid making a gratuitous mess of our affairs, we can look forward to being able to generate a huge increase in resources over the next 10 or 12 years.
Short of an unheralded general collapse of the global economy there are only two ways in which we could fail to achieve this potential. The first, already a real risk, would arise if an undisciplined outbreak of competitive pay concessions in the public sector prompted wage inflation. There is now a real danger of this - as Padraig Yeates cogently argued on this page on Thursday.
The second way of messing things up could arise from a failure by the Government to effect successfully the transition of our economy to the conditions of Economic and Monetary Union. We have made a bad start with this transition. The Government finds itself in the position of having considerable spare resources which could be used to improve public services, to tackle poverty, to cut taxation, or to invest in improving our inadequate infrastructure. But, partly because of unwise budgetary decisions last December, which stimulated growth in what was already a too rapidly expanding economy, the application of these spare resources to any of these good purposes could risk overheating our economy.
Nothing could be more ridiculous than to find ourselves in a situation where what we need, but seem unable to achieve, to put these spare resources to use in ways beneficial to our people is slower economic growth. To have got into this absurd position is not a sign of good economic management in the recent past.
Because we find ourselves in this situation, the Government is now faced with an invidious and potentially risky policy choice. It has been warned by the OECD, the European Commission and by the European Central Bank to tighten its budgetary policy. If it refuses to do so, and if this led to serious inflation, our State would not receive any sympathy from the European institutions. In this connection the tone of the Minister for Finance's reaction to this week's comments by the ECB president, Wim Duisenberg, was worrying. For he was reported as having avoided arguing the merits of the case, defensively asserting that the Bank president's views "are not in any way binding" and that while "the ECB is in charge of monetary policy, budgetary policy is a matter for governments".
That is true. But anyone who may have been led by his statement to conclude that because national budgetary policy is not a specific responsibility of the ECB, it is solely a matter for each national government, would have been seriously misled. For the Minister knows - and I hope and believe that the Taoiseach and other members of the Government know it also - that as is the case at national level, the Maastricht Treaty divides responsibility at the European level for monetary and economic policy between two sets of institutions. The European Central Bank is, of course, responsible for monetary policy, but the Commission and the Economic and Finance Council of the Union are jointly responsible for the supervision of national budgetary policies.
That is what is laid down in the Maastricht Treaty, which was negotiated and signed, and recommended to our people in a referendum, by our first Fianna Fail/PD government of 1989-1992. This European role in national budgetary policy is an essential ingredient of EMU. It has been strongly favoured by our Government as much as by others, for the good reason that, in the absence of such supervision and control, irresponsible budgetary action by one member-state could easily spark off inflationary pressures that might ultimately undermine the single currency. Now, the Minister may argue that no Community guidelines for our national policy have yet been formally adopted. While that is the case, the informal warning procedure that has already been invoked in our case can be a way of warning a State in good time that it is at risk of formal action being taken. The State in question then has the choice of mending its ways. If it doesn't take the recommended action, events may, of course show that the advice was wrong. But if, on the other hand, its economy does get into difficulties, it can then be subjected to considerable pressure.
For Article 2 of the the Treaty of Rome, as amended by Maastricht, requires the Community, inter alia, "to promote. . . non-inflationary growth", and Article 102a obliges member-states "to conduct their economic policies with a view to contributing to the achievement of the objectives of the Community as defined by Article 2".
Article 102a goes on to provide that, following certain preliminaries that involve, inter alia, the European Council, the Community's Economic and Finance Council can then be required to monitor economic developments in a member-state, including the consistency of these policies with the guidelines laid down by the Council. And "where it is established that the economic policies of a member-state are not consistent with these broad guidelines. . . or that they risk jeopardising the proper functioning of economic and monetary union, the Council may, acting by qualified majority, on a recommendation by the Commission, make the necessary recommendations to the member-state concerned" - and these recommendations may be made public, which could affect our credit internationally. It cannot, therefore be contended that budgetary policy is purely a matter for national governments: even where the problem is not one of an excessive budget deficit, the European Commission, ECOFIN, and European Council have roles to play in intervening with member-states whose policies are believed to have implications for inflation. That said, it must be added that in our case there exists a rational counter-argument against the kind of budgetary recommendations that have been emanating from external sources. The authors of the latest ESRI bulletin have put this counter-argument succinctly:
"The. . . reaction, as exemplified in recent international reports on Ireland's position in EMU, is to suggest that fiscal policy can be intensified to replace national monetary policy. This appears to be misconceived with regard to a small open economy, where changes in the fiscal stance are far more likely to be reflected in the balance of payments than in the rate of price inflation. . . Maintaining a climate where moderation in basic pay increases can continue is more important to future job prospects than any attempt to tighten fiscal policy as an anti-inflationary measure."
This appears to refer to the fact that the successful negotiation of another National Agreement looks like requiring a substantial increase in personal tax allowances and a belated widening of the standard tax band - concessions that the unions understood to have been agreed in the context of Partnership 2000, but which the Minister failed to implement in last December's Budget. The Minister can, it is true, argue that last December's reduction in the lower tax rate has helped meet the specific commitment in that agreement in relation to the tax position of a worker on the average industrial wage. But failure to implement substantially what the unions see as the understanding contained in the Department of Finance's Option P document of December 1996 could make it difficult to negotiate a further pay-moderating agreement.
There is some force in the views of the authors of the ESRI Quarterly, and I fully recognise the importance of creating favourable conditions for the negotiation of a further pay-moderating National Agreement. Nevertheless, if I were Taoiseach I would be doubtful about the wisdom of dismissing completely the advice of the OECD, the European Commission and the European Central Bank, unless I had good reason to believe that such a course was approved not just by the Minister for Finance but also by his officials and by the governor of the Central Bank.
Of course, whatever decision the Government takes will be loyally supported by Department of Finance officials in their contacts with the OECD and the European Commission. But the European officials to whom our civil servants would have to defend a further expansionary Budget at the end of this year will be quick to spot any lack of conviction in that defence. Moreover, the Central Bank governor is under no such obligation, and if he did not approve of such a policy, he could not be expected to undermine his credibility with his colleagues by attempting to defend it.
If on the first occasion that our national budgetary policy has to be determined in the context of EMU, it appeared to these institutions, and in particular to the Commission and ECB, that it had been decided by political considerations rather than on the basis of expert advice furnished by Finance officials and backed by the Central Bank, the consequences for us could be serious indeed.
For, if we were to be judged to have broken our economic policy commitments under the Maastricht Treaty, we could be dealt with very harshly - all the more so as we would be likely to be the first State to be adjudged to have done so, through what could be seen as an irresponsible refusal to rein in a rate of growth approaching double digit figures. Thus the budgetary choice to be made in the autumn is by far the most serious domestic issue facing the Government.