Fiscal Policy in a Monetary Union: the Case of Ireland, Proceedings of the Brussels Economic Forum

The authorfocused on thedispute that had arisen over the EU's economic guidelines between the European Commission and Ireland. He agreed with the Commission that there were strong grounds for arguing that Irish fiscal policy was too expansionary for the needs of the Irish economy and that overheating would be bad for consumers. However,it wasnot clear that this posed a threat to the stability of the whole euro area. The action to bring about a change in national fiscal policies should only be taken if the aggregation of national fiscal policies was seriously prejudicial to the interests of the euro area as a whole. But the Irish policy needed to be corrected. The labour market had dried up and tax cuts would not create more workers. Wage rates were going up too fast and therise in asset prices, as witnessed by the property market, risked stimulating a bubble that would ultimately burst. A series of macro-economic adjustments were needed to slow the economy, bring about a real appreciation of the currency in terms of a loss of competitiveness, and bring down asset prices. A tighter fiscal policy over the past two years could have helped contain the problem,the authorsaid: We should look at national fiscal policy in another way in a monetary union. What is the safe braking distance for a country like Ireland? Ireland has a favourable demographic situation and does not need to run large long-term surpluses to provide for future pensions. But fiscal co-ordination was needed at Euro area level to prevent one country's fiscal policies from harming other countries.