The Minister of Finance has dismissed suggestions by European Central Bank President Mr Wim Duisenberg that we may be "forced" to tighten budget policy later this year.
Mr Duisenberg warned in an interview in a French daily newspaper yesterday that Ireland could be forced to tighten budget policy to offset interest rate cuts and help control inflation.
However, last night Mr McCreevy insisted that Mr Duisenberg's point of view is "not in any way" binding on member states.
He added that the ECB is in charge of monetary policy, while budgetary policy is a matter for governments. "The reduction in interest rates and its effect on the level of economic activity is, of course, one of the items which myself and the Government will take into account when determining the appropriate budgetary strategy for 1999."
Unusually, Mr Duisenberg picked out Ireland for special mention in the interview with Le Figaro. He said that higher interest rates here and stronger growth here will "create problems" in managing the economy once interest rates are unified under the single currency.
"It is, therefore, necessary to use other guidelines, in particular budgetary policy.
"To offset a reduction in interest rates which could be considered too sharp, given its economy, this country could, therefore, be forced to tighten its budget," he warned.
Irish interest rates are set to fall by as much as three percentage points between now and the end of the year to meet German levels. The German inter-bank rate is currently at 3.3 per cent and is only likely to increase marginally according to the markets. The equivalent Irish rate is running at 6.19 per cent.
Mr Duisenberg is on record as believing that EU interest rates should converge at low levels which will be appropriate to France and Germany, the eurozone's biggest economies.
Other countries with faster growth would like to see higher interest rates. These include Ireland, Spain, Portugal, Holland, Finland and Italy. However, all will now need to consider other means to keep their economies from overheating.
Many analysts believe that the Irish problems are most severe because of the strength of growth of our economy and our exposure to the UK, which will not be a member of the new currency.
The ECB is the latest in a long line of institutions which have warned Mr McCreevy about his next budget. Already the European Commission and the OECD have issued similar warnings.
However, there is some disagreement here as to the likely effectiveness of these measures, which would involve holding back on promised tax cuts in the 1999 budget and tight control on spending measures.
However, the Economic and Social Research Institute has said that in a very small open economy such as Ireland purely fiscal measures are unlikely to be effective and more attention should be paid to wages.
It has warned that reneging on tax cutting commitments could undermine social partnership and that a resulting wage free-for-all could undermine competitiveness. Research ProfessorJohn FitzGerald has also called for some changes to immigration policy to cope with labour shortages.
