Irish policy-makers will not welcome the latest indications that the British government is pushing back the first date at which sterling might enter EU monetary union. The news puts the onus firmly on the Government and on industry to plan for how Ireland will cope with sterling's variations, once we are inside the single currency. Sterling was never going to be a founder currency of EU monetary union. But recent reports had suggested that the Labour government might be prepared to put sterling into the single currency not too long after the 1999 start date. However, this weekend the Labour government appears to be signalling that sterling will not enter monetary union until the next British parliament, which would mean after 2002.
An early British entry would have been good news for Ireland, as it would have limited the period for which the economy would be exposed to swings in the currency of our biggest trading partner.
But now Ireland faces the likelihood of a prolonged period of at least four years between the start of the single currency and the first likely sterling entry date. And, of course, if the project itself is not seen as a success, then sterling might never join.
The Government here has made clear that Ireland plans to be a founder member of the single currency no matter what Britain does.
And preparations have been successful in two respects. First, we will clearly meet the qualifying criteria for the single currency.
And second, technical preparations have proceeded apace and there is little doubt but that the public service will be geared up to manage the many complexities of moving to a single currency. Many businesses, however, have still to consider the many technical issues affecting them.
But there is an extraordinary lack of preparation for managing the economy inside the single currency.
It is striking that one of the reasons why Britain is swinging towards a later entry is that the Blair government believes that, to avoid inflation, the stimulatory impact of the lower interest rates which will follow from the single currency would have to be matched by higher taxes and lower public spending. Here there has been little consideration given to the overall way the economy would operate inside the single currency.
There are clear economic advantages to a single currency. And the Economic and Social Research Institute has calculated that these benefits for Ireland will outweigh the downside of the single currency, even if Britain stays out and sterling is volatile. But the ESRI calculations show that the net advantage to the economy may be small enough. And little thought is being given to how we can maximise our advantages and limit the downside inside monetary union.
If Britain stays outside monetary union for a prolonged period, then the Irish economy will inevitably have to adjust to periods when sterling is volatile. Because our pound will be locked inside the single currency, it will not be able to rise or fall in tandem with sterling. Also, we will be unable to independently adjust our interest rates. So the burden of adjusting to sterling's swings will have to be absorbed in other ways.
The Government of the day may have some flexibility to adjust taxes and spending, but even budgetary policy will be conducted within very strict guidelines under the EU stability pact. This pact appears to limit severely what could be a very useful route of adjustment for monetary union members.
The Government should be sitting down with the social partners to discuss these issues. And soon. What would happen, for example, if the British currency were to fall sharply in value against the euro? Jobs would be lost in companies exporting to sterling markets, unless they could find some way to compensate for the squeeze on their margins. The Programme for Competitiveness and Work mentions that profit sharing might be a way to tackle this.
Employees might, for example, benefit when currency moved or other factors favoured the company and profits rose and get less when things went wrong. But the issue has yet to be discussed seriously.
To succeed within EMU, companies will not only need to be productive. They will also have to be much more flexible, as the severe restraints on national economic policy will put pressure on other areas of the economy to adjust. And Government policy must itself encourage this flexibility, as well as continuing to focus on ways in which it can help to increase economic efficiency, such as by sensibly reforming the tax system.
The same considerations will apply in large measure to all the members of monetary union. But as a small economy whose largest trading partner looks set to stay out for some time, Ireland faces particular challenges in preparing for January 1, 1999.
