Good times are back, but Ireland faces twin boom-bust risks

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By Cormac Lucey

Last week’s International Monetary Fund (IMF) statement on the Irish economy was not surprising. Yet it still offers a very useful overview of the economic challenges facing the country. The good news is that, according to the Washington DC-based boffins: “Growth is robust and broad-based, and unemployment is at levels not seen in almost a decade.”

It may sound daft, but in five years we might look back with fond nostalgia at the Enda Kenny era. Who knew?

The challenge now is to translate the recovery into a new foundation for sustainable and inclusive growth, says the IMF. That will require “future-proofing” the economy against the re-emergence of boom-bust dynamics.

There are two main sources of boom-bust risks. One arises from the fact that Ireland is a small economy and, through its very large stock of inward investment, is disproportionately exposed to the global economy and to global trade.

There is little that we can do about this — if we want the huge benefits of foreign direct investment, we must accept the economic volatility that goes with the territory.

The second risk comes from Ireland’s continuing membership of the eurozone. The key economic consequence here is that we get interest rates appropriate for the common currency area rather than for our national needs. Ireland more closely follows the economic rhythms of America and the UK then those of Germany and France.

We again face the risk of interest rates that are too low. The danger now is a gradual build-up of unsustainable economic imbalances that propel upwards domestic costs — for example, public sector wages — residential house prices and credit levels.

The parallel risk we face is a policy establishment that would rather tell fellow citizens what they want to hear — that happy days are here again — rather than what they need to hear — that it’s not advisable to hit the bottle again so soon after exiting the dry-out clinic.

Published in The Sunday Times (Irish edition)

May 21st 2017

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