Sir, - Will the recent increase in the value of the punt, relative to other ERM currencies, push up the rate at which the punt is locked into the single currency, at the end of next year? This particular aspect of the single currency issue deserves more attention than it is getting.
We may not be experiencing obvious difficulties at present with an exchange rate of around DM2.65, but this doesn't necessarily mean we can afford to lock ourselves in at that rate in perpetuity. Our economic cycle is out of phase with the mainland European one: we are at the top of our cycle, while many of our partners are at the bottom of theirs. In a few years, the reverse may be true: will a rate of DM2.65 be painless in those circumstances.?
If EMU happens on schedule, and involves Ireland, it would be prudent to try to hold on to the advantages of the 1993 devaluation. At present, it seems possible the punt will end its days as the hardest component of what is intended to be a new hard currency, with the result that we could become overvalued against not only Britain, but the rest of the world as well. Most of the economic progress made in Ireland since 1980 has been made in the years immediately following the EMS devaluations of 1986 and 1993. Perhaps this is a coincidence, but, since we don't know for sure whether it is or not, it seems fairly, risky to reverse a past devaluation at the same time as we rule out all future ones.
Under the Maastricht Treaty, countries qualifying for the single currency have to agree unanimously on the rates of which their currencies are locked together, so Ireland can't be compelled to lock in at a rate it regards as too high. However, the longer the punt stays around DM2.65, the greater the likelihood that this will find its way into the formula for determining the rates at which currencies lock together, and the less plausible any attempt by Ireland to argue against this will seem. Unless there is some definite reason for expecting that Ireland will be able to lock in well below the current exchange rate, it may be dangerous to leave matters as they are.
The Irish authorities are reluctant to take action which would reduce the value of the punt, partly because of fear of excessive inflation of housing prices. This is an eminently reasonable fear, but should we risk prejudicing long-term international competitiveness, to contain (rather ineffectively) a short-to-medium domestic management problem? An alternative would be to suspend mortgage interest relief on houses bought after March 1997, except for first-time buyers. This would have the same effect as a sharp rise in interest rates, but only in relation to houses coming on to the market from now on. Its impact on purchasers would be partly offset by lower house prices,
In a volatile situation, there is a natural reluctance to take this sort of measure, as a sudden shift may then make it unnecessary. However, having committed ourselves to a project which combines major uncertainties with irreversibility, some insurance policies may be justified. - Yours, etc.
Wellington Square, Magazine Road, Cork