Sir, - In his criticism of my article on the euro, Sean Barrett (January 4th) focuses on the dispute over the Irish Budget in 2001. Nothing in my article, explaining the long-term motivation for a single currency in Europe, implied a view, one way or another, on the dispute over Irish fiscal policy.

He argues that the weakness of the euro in the past three years has harmed the Irish economy. I have no doubt that if and when the euro rises in value, Sean Barrett will be to the fore in arguing that its strength is undermining Irish competitiveness.

To this school of up-and-down economics, the EU and the euro can do no good; its complex reality is always compared with an ideal, but unspecified, alternative in which both low inflation and price competitiveness would be perfectly achieved.

I am concerned, however, that his letter may lend credence to a widespread misunderstanding of the way in which European monetary and economic policy works. He says that the EU "embarked on a campaign of recrimination against Irish fiscal policy" and "interfered in Irish economic policy"; and he accuses the EU of "meddling".

The dispute over the Irish Budget was undoubtedly an important factor in the outcome of the Nice referendum. But this is largely because the procedure for co-ordination of economic policy was misunderstood or misrepresented.

There are good reasons for co-ordinating national fiscal policies in an economic and monetary union. Fiscal policy in one member-state can have spill-over effects on others. Too stimulatory a fiscal policy in the euro area requires the European Central Bank to tighten interest rates, with adverse effects on economic activity and employment in all member-states.

Indeed, it is particularly in the interest of small member-states that the Union has the ability to co-ordinate fiscal policy. This is graphically illustrated by the way in which the unilateral approach to fiscal policy adopted by Germany after unification forced an increase in German and then European interest rates, such that, as shown by Prof John FitzGerald of the ESRI, "the incipient boom in Ireland was halted in its tracks in 1990".

The European system contains a mixture of relatively "hard" and "soft" methods of co-ordination, depending on the matter under discussion. The avoidance of excessive budget deficits is achieved through binding rules, set out in the Stability and Growth Pact, which can culminate in formal sanctions, including fines. By contrast, co-ordination of national economic policy through a set of "Broad Economic Policy Guidelines" is relatively soft. Where a member-state deviates from the guidelines, the Council can issue a non-binding recommendation to the member-state in question, which is not supported by any sanction.

Thus, we should be clear that in 2001 Ireland was the subject: not of the imposition of a macroeconomic/monetary policy by a large, more powerful, neighbour (as we experienced from 1826 to 1979, when our currency was linked to sterling); not of a political instruction, "interference" or "meddling" by the EU; but of a non-binding recommendation from our partners, based on a Broad Economic Policy Guideline that Ireland had itself helped to draw up.

The important issues now concern Ireland's past and future position in the EU and the conduct of policy in Europe. The Budget dispute was used to suggest that Ireland is bossed around in the EU. In fact, it was the first time that an Irish Minister failed to get other member-states and the Commission to see and understand the subtleties of the Irish situation. It was the first time that the usual EU process of analysis, persuasion, deliberation and negotiation was replaced by a form of megaphone diplomacy in which an Irish Minister addressed our European partners through a personal article in the Financial Times.

While Ireland has always fought its corner with vigour, and usually with success, it is very unusual for Ireland not to reach a successful negotiated outcome in the European process. The dispute over the 2001 budget is the exception, not the rule. Sean Barrett suggests that "Ireland should be giving the lecture and the EU listening". To do this successfully, Ireland must be in the euro and fully engaged in the European Union. - Yours, etc.,


Department of Business



Dublin 4.