Short-term uncertainty and longer-term confidence are the themes of two authoritative commentaries on the Irish economy, published yesterday. Growth rates for this year and next are revised downwards by the Central Bank and the Economic and Social Research Institute (ESRI). They point out how much Ireland's economic fortunes depend on what happens in the United States and Europe. They underline the economy's potential competitive vulnerability as the euro is introduced. But in the longer term, they say economic reforms, structural change and healthy fundamentals put Ireland in a good position to benefit from an international upturn. The Central Bank points out that this is the sharpest and most synchronised international downturn for two decades and reminds its younger readers, who have not had this experience, that recovery will follow.
That message of longer-term confidence must be qualified by how events are managed by the Government and the social partners. If a recovery fails to materialise in the US next year, unemployment could reach six per cent here. A euro appreciating substantially against the dollar and sterling would add to the competitive pressure on international and domestic firms and on rising wage levels. It is impossible to predict this accurately; both commentaries rely on authoritative assessments of the likely out-turn in the US especially, which are borne out by the latest reports from the International Monetary Fund (IMF). They expect a definite US recovery from recession in the second half of next year, with substantial knock-on effects internationally. That prospect is likely to underlie most planning for the year to come.
The other major economy affecting Ireland's fortunes is Europe. The IMF recognises that the eurozone is less vulnerable than the US to adverse shocks affecting confidence and activity. Its external balances are stronger, households less indebted and less exposed to stock-market developments. Business concerns about over-investment and over-capacity appear to be lower than in the US.
Both the Central Bank and the ESRI, stress that the introduction of the euro and the prospects of a "big bang" enlargement of the European Union to take in 10 more members over the next two years will profoundly affect Ireland's economic performance. The euro adds stability to interest rates and will deepen access to markets. The ESRI insists this is a sine qua non of foreign direct investment in Ireland and that the euro further embeds Ireland in the European economy.
This lesson must be properly absorbed. Ireland cannot afford to risk isolation from its main economic partners that would follow a failure to ratify the Nice Treaty and thus delay enlargement. It would be foolhardy to antagonise these 10 states as they prepare to join the EU. Politics and economics therefore converge as Ireland faces into an election year in which economic management will be a major issue. These two reports usefully reveal the economy's strengths and weaknesses ahead of that electoral contest.