The new government, which Mr Bertie Ahern is expected to form, will have no time to waste in addressing some key areas of economic policy. None will be more important than monetary union, a project now facing uncertainties which will pose difficult decisions for European governments in the months ahead. Other key issues facing the incoming administration include public sector pay, framing the 1998 Budget and dealing with the semistate sector.
The Rainbow Coalition is handing over a robust economy. Economic growth has been running at record levels, employment is rising strongly and inflation remains subdued. The public finances are also in good health, with a substantial surplus on the current budget on the cards this year. And most forecasters believe that strong growth is set to continue for the next year, at least.
The new government will hope that such predictions prove correct. But in planning for the future it will have to turn its attention immediately to the monetary union issue. It faces two challenges. One is to develop a policy in response to the major arguments developing at EU level over the approach to monetary union. And the other is to advance Ireland's preparations for membership of the single currency.
It is still likely that the move to monetary union will go ahead on schedule on January 1st, 1999. However, it is far from certain. The French government signalled yesterday that it wanted to review the stability pact rules, which will govern states once they are inside monetary union. It may be that a compromise can be reached by inserting a commitment towards employment in the pact, but Germany will resist any substantial watering down of its terms.
Meanwhile, Germany and France are themselves struggling to meet the Maastricht criteria, particularly the rule which stipulates that budget deficits must be below 3 per cent of national output this year. Such uncertainties mean that the monetary union project is set to dominate the European agenda over the next year. The new government must therefore have a clear view about its priorities for the project, so as to be able to react to developments at EU level in the crucial period ahead.
In looking at Irish preparations for monetary union, a more proactive approach is warranted. Mr Ahern has already committed himself to Irish membership of the first group moving to the single currency in 1999 and Fianna Fail held a useful policy discussion forum on the issue during the election campaign. Now it must lead the debate about preparations for membership and seriously consider the appropriate policy approach once inside monetary union.
All the other major policy issues also relate, in one way or another, to monetary union. It is absolutely essential, for example, that exchequer borrowing be kept on a downward track at a time when the economy is growing so rapidly, to allow some flexibility once inside monetary union. Tighter control of public spending is a vital component of budgetary discipline and how the new government handles a range of public sector pay demands will be crucial.
Tax reform is also an important preparation for monetary union. The new government will no doubt feel that it has to deliver on some of its election tax cutting promises. But in framing its Budget, its main emphasis must be on improving competitiveness. It is also time to consider how the economy might be prepared to deal with specific economic difficulties once inside monetary union. It is an imposing agenda. However, the new government has the advantage of inheriting an economy which is in good health. This gives it flexibility in dealing with key economic challenges, which it must now use wisely.