Macroeconomic Adjustment in Ireland under the EMU

Macroeconomic Adjustment in Ireland under the EMU

Embargo: 00:01 a.m. Friday 30 March 2007

Iulia Traistaru-Siedschlag, ESRI.

Special Article in the Quarterly Economic Commentary, Spring 2007. 

The macroeconomic performance of the Irish economy in the EMU until now has been successful, primarily due to favourable domestic supply factors and external conditions as well as the reduction of the risk premium. The resilience of the Irish economy under the EMU will be fully tested by a downturn.

This analysis identifies four main macroeconomic challenges to the Irish economy in the future: 

a) maintaining a high potential growth rate
b) restoring competitiveness
c) managing potential risks to macroeconomic and financial stability from the housing market
d) adjusting to shocks originating outside the euro area

To respond to these challenges a combination of policy measures are suggested.

• In the long run, productivity growth is key to maintaining a high potential output growth.
• To restore competitiveness a decline in relative unit labour costs competitiveness may be required.
• Fiscal measures could help to promote investment diversification and reduce the risks from over-investment in residential property.
• The resilience of the economy to idiosyncratic shocks will most likely rely to a large extent on the flexibility of product and labour markets and an enabling business environment to enterprise and investment.
• An effective countercyclical fiscal expansion in response to a slowdown of the economy depends on achieving a large fiscal surplus during the current boom.