Ireland EMU

HEAD-EMU

Country Analysis

Ireland


The probability of Ireland joining EMU from the beginning date remains quite high. Nevertheless, the close relationship of Ireland and Britain does pose somewhat of a problem for the future of Ireland and its committment to EMU. Certainly, Ireland continues to perform very well on its economic fiscal front. However, Ireland’s debt/GDP ratio remains quite high within the EU. Still this has improved greatly over the past 10 years thanks to an aggressive tax policy designed to attrack business from around the world. As a result, debt/GDP has decline from the staggering level of 116% in 1987 down to a projected 73%-75% level by the end of 1996.

Curently, fiscal budget for 1997 included significant tax cuts keeping up the supply-side economic policies that have worked so well for Ireland. Still, the General Government Deficit is projected to come in around only 1.5% of GDP. While this is a slight rise from the previous year’s deficit of 1% of GDP, Ireland is still well within the guidlines of the Treaty criteria making this nation the true jewel within Europe. It is possible to see strong economic growth at least into mid 1998, which should allow the projected deficit to be achieved and thus the debt/GDP ratio may fall further to under the 70% by the end of 1997.

There is little doubt that Ireland has a few problems relative to the EU. Ironically, it has been the economic success of Ireland that has cause significant international investment to pour into the country leaving the rest of Europe behind. Concerns on the Continent have also aided in a capital flight into the UK and Ireland. The Irish pound has risen sharply even against sterling and now it stands at nearly 10% above the weakest currency in the EU system. In terms of the exchange rate criteria, the strong Irish currency has posed somewhat of a problem.

Politically, Ireland must eventually decide if it will enter on the first round in 1999 into EMU given the fact that Britain is most likely not going to enter until the second round. The current government in Ireland does remain completely committed to EMU membership. However, with a general election due before the end of 1997, we could find that Ireland takes a second look at joining without Britain and the effect that might have on its own economy. It would appear that if Ireland does join in 1999, all the attractions and advantages for international investment into this nation will come to a sudden and dramatic end. This would tend to imply that the economy in Ireland is reaching a peak in growth and that the future will be drastically different than the experience of the past 10 years.

 


1995 1996e 1997f
ERM Member Y Y Y
Inflation 2.5 1.6 2.4
Budget Deficit / GDP 2.4 1.0 1.5
Debt / GDP 81.6 73.3 68
10Y Bond Yields 8.2 6.7 6.7
f=forecast e=estimate

 

© Princeton Economic Institute

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