The president of the European Central Bank, Mr Wim Duisen berg, has warned the Government not to fuel inflation by introducing a giveaway Budget. He also cautioned that the current high inflation rate cannot continue indefinitely.
Speaking at the annual dinner of the Financial Services Industry Association in Dublin last night, Mr Duisenberg said that the European Central Bank could not work to reduce inflation in any one member-state in isolation. It was up to the Government to tackle the problem.
Inflation in the Republic is currently running at 6.2 per cent, almost three times the EU average.
Mr Duisenberg also warned that the "free ride" could not be allowed to continue - in other words, the Republic is enjoying lower interest rates than would otherwise be the case in a booming economy.
"Economies like the Netherlands and Ireland are experiencing a little bit of a free ride which cannot last forever", he said. "Either policy can deal with this or the markets will deal with it in a more painful way later."
This was seen as a warning that, if inflation is not reduced, it could eventually lead to a sharp decline in economic growth by undermining competitiveness.
As Mr Duisenberg spoke, the outlook for the Republic's inflationary problems continued to worsen, with oil prices hitting record highs and the euro falling to an all-time low.
He insisted that if action was required to tackle inflation it had to be taken through national economic policies, particularly in smaller euro zone countries.
Mr Duisenberg's comments were last night being interpreted as a clear message to the Government that it must act quickly to curb spiralling inflation.
Ulster Bank economist Mr Aziz MacMahon said that the ECB president was warning the Government to be prudent with the upcoming Budget. "The danger is that another giveaway Budget could destabilise the economy and add to inflation", he said.
Mr Duisenberg avoided talking about the collapse of the euro. But he did stress the importance of structural reform to revive the European economy.
Bank of Ireland's chief economist, Mr Jim Power, warned that the euro was now "virtually in free fall". And there was little that the ECB or the European Commission could do about oil prices, he said.
Following days of protests over the escalating price of oil, the French government yesterday agreed to tax cuts, but the European Commission immediately responded that it would have to scrutinise this under its unfair competition rules. Similar fuel price protests are being planned in Spain.
The European Energy Commissioner, Ms Loyola de Palacio, said yesterday that the EU wants the price of oil to fall to about $20. She said that she was very worried by the price of oil, which has risen from $10 a barrel at the end of 1998 to a 10-year high of more than $30 now, with no sign of a turnaround.
Yesterday, crude oil rose for a fourth day and reached a 10-year high on traders' expectations that any production increase agreed to by OPEC this weekend would not be sufficient to reduce prices or relieve declining inventories.
The Organisation of Petroleum Exporting Countries meets in Vienna on Sunday to consider a third increase in output this year. OPEC members deny that there is a shortage of crude oil, instead urging governments of consuming countries to cut taxes to bring down consumer prices
The euro fell to $0.8757 - the lowest since its debut in January 1999 - from $0.8876 cents on Tuesday. In late trading it fell below 87 cents.
The full text of Mr Duisenberg's speech at the FSIA annual dinner is available from the website of The Irish Times, www.ireland.com