Ireland's euro dilemma

The Irish economy is enjoying an unprecedented boom

by BBC business reporter Jonty Bloom

Ireland has once again been in the news this week as its inflation rate hit a 15 year high of 6.2% in July, up from 5.9% the previous month.

To put that in some kind of context, it is twice the average level in the eurozone.

But because Ireland only accounts for a small fraction of the European economy there is precious little chance of the European Central Bank raising interest rates in order to dampen down inflation in the Republic.

And although it is likely that interest rates in the eurozone will rise in the near future that is unlikely to be enough to constrain the runaway Irish economy.

The Irish Government has already tried to introduce some price controls on drinks as part of an anti inflation strategy (a popular decision in the home of the black stuff).

It is now thought to be considering the repeal of the Groceries Order, which bans below-cost selling of a range of food staples.

That should increase competition in the food market were prices are rising even though they are falling in the rest of Europe.

Wage fears

But the Government needs to do more than that, not least because the current inflation rate is a threat to the National Wage Deal which was agreed last March, since when inflation has doubled.

The Irish Congress of Trade Unions said on Tuesday the July figures underlined the importance of a review of the wages deal.

But that could lead to a dangerous spiral of higher wages and higher inflation as workers continually demand the renegotiation of their wages to make up for price rises.

This is something that should be avoided at all costs.

The real answer, as most economists know and the International Monetary Fund pointed out last week, is to slow down the economy by raising taxes. However the Government doesn't want to or can't do that, not least because it would be just too unpopular.

That illustrates one of the problems with a 'one interest rate suits all' policy. Taking interest rates decisions out of the politician's hands, increases confidence that vital economic measures won't be influenced by political considerations.

Taxing times

But it leaves fiscal measures as the only way individual countries can fine tune their economies and decisions on raising or even cutting taxes are still in the hands of those self same fickle politicians.

We all know the one thing politicians hate above all others is biting the bullet and increasing taxes is even less popular than raising interest rates.

But as I have pointed out in this column before, if the euro is to succeed government's can't just leave everything to the ECB in Frankfurt and hope for the best.