TIME EUROPE
NOVEMBER 29, 1999 VOL. 154 NO. 22
Irish Eyes Are Smiling
Economists forecast continuing high growth, but euro membership brings a danger of overheating
By HELEN GIBSON Dublin
Cranes poke up everywhere above the gray Dublin skyline as traffic below regularly gridlocks a city clogged by the thousands of new cars that pour onto the road system every week. Trendy young professionals jam restaurants each night and not just in the traditional tourist and nightlife areas. The once dour city exudes a zesty sense of affluence and success. Says Fiona Corbett, manager of an upmarket cheese shop in the city center, "We're doing well, business is booming."
Ireland is doing better than just well. Economists predict its gross national product will grow more than 6% in 1999, for an annual average growth of 6.7% between 1995 and 2000. Unemployment has plummeted to 5.8%, down from 17% a decade ago; inflation is under 2%; public finances are in surplus; and Dublin taxi drivers have taken to boasting to visitors about the shrinking national debt. John FitzGerald, research professor at Dublin's influential Economic and Social Research Institute, refuses to talk of a Celtic tiger, however. "I'd prefer to think we made such a mess of things before, we are just getting to where we should have been," he says. Nevertheless, it is deeply satisfying to everyone that, together with Finland, Portugal and Spain, Ireland is outperforming its heavyweight euro-zone partners. Even more satisfying, the E.S.R.I. predicts that annual growth, fueled by the euro zone's low 3% interest rate, will continue at around 5% until 2005.
Ireland's charter membership in Europe's Economic and Monetary Union has helped to fuel this recovery, but economists are beginning to question whether such a vibrant economy needs so much extra energy. Jim Power, chief economist at the Bank of Ireland, thinks that being part of EMU will exacerbate the usual problems which accompany a boom. While European membership and Brussels money has greatly contributed to Ireland's growth, joining the euro was a step deemed only "mildly favorable for Ireland" by FitzGerald, a Euro-enthusiast.
Ireland's economic cycle, like Britain's, is out of sync with the rest of Europe. Right now it would be better served with a 6% to 7% interest rate rather than be straitjacketed inside the euro zone's 3%, says Power. He and many other economists worry that the economy is overheating and that boom could turn to bust. They are particularly concerned at Ireland's roaring housing market. Prices in Dublin have more than doubled since 1995, with lenders offering ever-lower mortgages, though that trend could be slowed by the .5 percentage point rise in the interest rate decreed by the European Central Bank earlier this month.
More worrisome, shortages of both skilled and unskilled workers are already popping up. That could begin to discourage foreign investors drawn by both the low 10% corporate tax rate and a large, well-educated, English-speaking workforce which is relatively low cost by E.U. standards. Despite a decade of national wage agreements negotiated between government, unions and employers, in which voluntary pay restraints have been exchanged for relaxing onerous personal tax rates, wage demands are escalating. Last month, 27,500 nurses went on their first-ever strike for better pay and conditions, and were partially successful.
EMU membership means that the Irish government has much less power to manage the economy. It has surrendered control of interest rates, and Ireland's small economy--it accounts for 1% of Euroland's economic activity--means it has little clout within European councils, particularly the E.C.B. Loss of control of the exchange rate also means the devaluations of the past are over. Fiscal policy as an instrument is an option, but here, too, Dublin is hamstrung. According to economic theory taxes should be raised in times of strong economic growth, but Dublin will find it politically hard even to take the Economic and Social Research Institute's current advice and cut in half the regular tax concessions given to workers in return for wage restraint.
Power worries that EMU is helping a boom when deceleration is needed, and that "Ireland is rudderless as it moves forward." He adds, only half-jokingly, "Probably the most effective policy instrument now at the disposal of Irish authorities is prayer." But FitzGerald counters that the Bank of England effectively dictated Ireland's monetary policy in the past because of the close monetary and commercial links between the two economies. At least Ireland now has a seat on the E.C.B. He claims that even if there is a collapse in housing prices, "the costs will be less, because we are members." FitzGerald also argues that while monetary and fiscal policy are important, the government's supply-side policies in such areas as deregulation, foreign direct investment and education are the real reasons why the economy is doing well. "And the government still has freedom of action there," he says.
E.U. membership was crucial to Ireland's economic rebirth, so it is easy to understand why the country leapt at the chance to join EMU. Economists like Brendan Walsh, professor of economics at University College Dublin, may believe that "It's still too early to pass judgment" on that decision. But for now one would be hard pressed to find many Irish--especially among the crowds out for a lively night on the town--who would have any qualms.
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