Ireland - Future trends

For most of the latter half of the 20th century, Irish policy makers focused on the challenge of how to instigate sustainable economic growth that would serve to reduce high unemployment and emigration levels and to increase standards of living to the European level. In the 21st century, the key challenge is to implement a policy mix that sustains the benefits of growth while dealing with the key interlinked threats posed by inflation and acute labor market shortages. In 2001, rising inflation has seen the cost of living increase considerably, and this, alongside more demand than supply in the labor market, puts strong upward pressure on wages.

Dealing with inflation and labor market shortages is complicated by the extent to which external forces affect Ireland's economy, which is a regional, export-oriented economy within a monetary union. For example, the health of the euro and trends in global oil prices will either help or hinder the curbing of inflation. Lower oil prices and a stronger euro would reduce the cost of imports and, thus, inflation. Another important external force is the slow-down in the U.S. economy (2001). This could decrease the United States' domestic demand for imports, at the same time decreasing multi-national companies' investment in the Irish market, thus putting trade volume, employment, and growth at risk. In turn, spiraling inflation could result as job losses cause people to struggle to pay mortgages and the high levels of credit that have been the trend throughout the 1990s and beyond.

While there are differing opinions as to which policies are most effective to curb inflation and thus reduce the upward pressure on wages, most commentators agree that a flexible fiscal policy, in particular flexible wages (using wage agreements), is vital if both are to be avoided. Flexibility is necessary because of the dual and uncertain nature of external challenges to economic success.

Different external factors call for different reactions. The immediate problem facing the government in 2001 is the threat to social partnership policy-making posed by the increasing demands of unions for higher wage agreements. Higher wages and a break in the partnership would threaten the competitiveness of the Irish labor market, which remains relatively cheap compared to the rest of Europe. But competitiveness is also at risk as a result of labor market shortages.

It is likely that moderate wage increases to maintain social consensus (partnership agreements) are required alongside policies to encourage immigration (to increase the labor market supply) and policies to encourage savings (to reduce the threat of inflation). However, different policy responses would be required should the U.S. slowdown reach the point where foreign companies pull out, thus reducing employment. Attempts have been made to prepare for this scenario; the IDA has put more emphasis on health care and e-commerce companies and on research and development functions to deepen the roots of foreign investment, thus lessening the risk of an exodus.

A healthy future economy largely depends on how government responds to uncertain threats, and it would appear that the adoption of a flexible approach is vital. This is in turn a prerequisite for improving the quality of life and diverting a percentage of expenditure to programs designed to narrow the disparities in individual prosperity.