MANAGING THE RISKS OF EMU

Economists and business people are finally turning their minds to serious consideration of EU monetary union

Economists and business people are finally turning their minds to serious consideration of EU monetary union. This weekend's gathering of economists in Kenmare, Co Kerry, for an annual policy conference was dominated by consideration of the subject, while in recent weeks leading business figures have expressed diverse views on the single currency. The notable feature of the emerging debate is that it not only includes strident views "for" and "against" the single currency, but also very detailed arguments: about the way monetary union is being handled and the implications for the economy.

The debate is not likely to alter the Government's determination that the pound should be a founder member of the single currency. Across the EU a strong: political push is now under way to ensure that monetary union goes ahead on schedule in 1999 and the Government believes that it is vital that Ireland be a founder member. For some years now meeting the conditions set down in the Maastricht Treaty for qualification for the single currency has been a central aim of Government policy. A recent report from the Economic and Social Research Institute, commissioned by the Government, found that the quantifiable benefits of joining monetary union exceeded the costs, even if Britain remained outside. When the unquantifiable economic and political benefits are taken into account, the ESRI researchers argue that the case for Irish membership is a relatively strong one.

The ESRI report has both its supporters and its critics, as was evident at the Kenmare conference. Sceptics argue that the ESRI got it wrong when it concluded that the benefits from lower interest rates inside EMU would outweigh the potential costs from sterling volatility, assuming Britain is not an initial member of EMU. Others including some strong supporters of the "European" ideal - also question whether the strategy and timetable drawn up for the move to monetary union are appropriate and whether there are dangers in allowing the political momentum to outweigh economic considerations.

There are certainly risks inherent in the move to monetary union. But it must also be recognised that the decision has been taken at a political level both here and in many other EU states that monetary union will happen. This does not mean, however, that all the criticisms should be dismissed. Instead the Government must acknowledge the risks and develop policy approaches which would allow Ireland to prosper within the single currency. Recent governments have succeeded in keeping exchequer borrowing at a low level and maintaining a low rate of inflation. This stability explains much of the recent economic progress. But monetary union will bring new challenges, particularly to an economy such as Ireland's which is small and highly exposed to international trade. The exchange rate will be fixed and budgetary policy will be conducted within strict guidelines.

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A much greater premium will thus have to be put on ensuring flexibility in the economy in areas such as the jobs market, particularly if Britain stays out. Otherwise a sharp fall in the value of sterling will cause heavy job losses. All the signs are that the single currency area will not have a substantial centralised budget to help out areas of the union hit by a temporary set back, so the onus of adjustment will fall back on individual member states. Industry will gain from the elimination of transaction costs, but will also face a long term competitive squeeze within monetary union. In effect, the challenge for Ireland will be to become as productive as the core states of Europe with which we are linked through the single currency. This has major implications for policy in areas such as taxation, Government spending and competition. The Government may be convinced that Ireland will qualify for the single currency. But it must now start to plan much more seriously for what will happen after we join. If a new national agreement is to be finalised, then planning for monetary union must a central element of its content.