One of my fondest memories is of Bertie Ahern at a debate at Trinity College in Dublin shortly after sterling had left the European exchange rate mechanism in September 1992; Ireland was struggling with a pound that had stayed in while sterling had devalued by some 20 per cent.
Mr Ahern, then Minister for Finance, had a mantra for the evening: "I will not devalue the punt." Of course within a few months he had done just that. Why? Because in those days, when Ireland controlled its own interest rates and currency, it would have been madness to be a fifth overvalued against the country of which you are virtually a part.
Those days are far away but the logic remains, in reverse. Today, sterling has soared by about a fifth against the euro, to which the hapless Mr Ahern, now Taoiseach, is tied without recourse. In a continent of huge divergence, Ireland stands out as the most divergent of all - growing at up to 10 per cent, while Germany and Italy may with luck be shocked by this huge devaluation into 3 per cent growth. In Frankfurt, the European Central Bank council smiles indulgently: Ireland is too small to worry about - it and the rest of the "periphery" can take its chance.
And what will that be? Since the reforms started by Mr Charles Haughey back in the mid-1980s, which re-modelled the country on the new Thatcherite Britain, Ireland has been a fast-growing economy with low labour costs and general deregulation. It has attracted huge amounts of mainly US investment, much of it in the computer and software business.
The big countries of the EU have never felt threatened by the "Irish model", with its fewer than four million souls. So, like many of the EU's small countries, the name of its game has been to say "yes" to Germany and France, collect the agricultural and regional largesse, and get on with competitive deregulation on the quiet.
With or without the euro, Ireland was always going to grow quickly. What the euro has done is to take away the restraint that would have been exercised by monetary policy. Consider a sample of the latest figures. Car registrations in April were up 49 per cent on a year earlier; house prices in Dublin were up 31 per cent in 1998 and another 22 per cent in 1999, with latest figures thought to be running at around 13 per cent, and thousands of expatriate Irish are being lured back to the homeland. May's retail sales volumes were 20.3 per cent up on a year before. So far, inflation, though rising strongly, has been held back despite this runaway boom coming on top of already-strong growth (Ireland grew by an average of over 8 per cent per annum from 1994 to 1998). Its underlying retail price index (excluding mortgage rates, held down by the euro) rose 5.9 per cent in the year to July - much of it, though, due to tobacco tax and oil. Average earnings are rising by around 5.5 per cent, which, with productivity growth strong, is not yet a problem.
But this relative restraint of prices and wages is built on an incomes policy - the national agreements - buttressed up to now by high levels of immigration that have kept the supply of labour not so far behind ever-growing demand. Experience with incomes policies shows that they do not last against the pressure of supply and demand; in Ireland, it can only be a matter of time before the dam breaks. Already, there are calls for an upwards renegotiation of the latest national deal, and there is a rash of industrial action.
There are two main possibilities: either the Government encourages yet more thousands of immigrants and allows house prices to be driven up to the stratosphere, in which case union demands will be fuelled by housing costs; or the flood of immigrants is stemmed, in which case the wage demands will be fuelled by a severe labour shortage.
So far, the incomes policy has held, but the whiff of a winter of discontent is in the air.
Where will this end? Ireland is a "tiger economy" whose emerging-market dynamism was in any case bound to bring rising real (inflation-adjusted) wages and prices relative to other countries. As an economy modernises and acquires new industries, its rising productivity allows real wages to rise and the new industries can charge higher prices in world markets.
As growth spills over into humdrum local services like transport and schooling, whose productivity cannot grow so fast, their relative prices will be pushed up by rising real wage costs, by the scarcity of land and by sheer demand pressure.
This can happen in two ways. With the exchange rate fixed and monetary policy set somewhere else, it will happen through rising prices and money wages. With the exchange rate free to move and monetary policy set to keep prices under control, it will be the exchange rate that rises to raise the real value of wages and the relative prices in world markets; so it has been for the UK and so it would have been for Ireland had it stayed out of the euro (with sterling and the dollar).
By joining the euro, therefore, Ireland chose systematically higher inflation to accompany the heady growth it would have had in or out of the euro. But there is a further element in its euro brew: loss of control over its business cycle. Ireland is "enjoying" a huge boom that would never have been permitted under a floating pound, when interest rates would have already been up to seven per cent or above.
Of course, it is this boom that has got such admiring and naive reports from the BBC; but a hard landing cannot be far away. Its most likely form would be a collapse of the incomes policy, wage costs escalation, and spending cutbacks by investors and consumers as the Government takes emergency action - perhaps huge tax increases or a floating tax on buying pounds (a backdoor floating exchange rate).
The ensuing slump will be far worse than it would have been had the boom been kept under control. Higher inflation and reinforced boom-and-slump is an unattractive recipe for UK citizens and businesses. That's the lesson of Ireland and the euro.
Prof Patrick Minford was and continues to be an informal economics adviser to the former British Prime Minister Mrs Margaret Thatcher. From 1992 he was one of a panel of forecasters known as the "six wise men" who advised the UK Treasury while John Major was prime minister. Prof Minford is currently Professor of Applied Economics at Cardiff Business School
