The top priority in December's Budget should be to keep inflation down, the European Monetary Affairs Commissioner Mr Yves-Thibault de Silguy has said. Speaking in Dublin Mr de Silguy said the Irish economy has recently been showing signs of overheating.
"Your inflation was 3.2 per cent in August, the highest of any euro zone country and other indicators such as wage settlements, housing prices and private sector credit growth confirm the dangers," he said.
He was speaking at a briefing in Dublin, after addressing the Irish Association of Corporate Treasurers.
He said the recent cut in interest rates will "inevitably be followed by further reductions as Irish rates converge to the best performers in the euro zone by the end of the year," he said.
He added that against this background "it is vital to remain vigilant against inflation and that "additional budgetary rigour" is needed. Yesterday Mr de Silguy met the Minister for Finance, Mr McCreevy, to discuss the changeover procedures for the euro.
Mr de Silguy said that Mr McCreevy understood the need "for sound public finances" and he added that the Irish Government has already committed itself to "keep expenditure within the ceilings in the 1998 budget and to use unexpected receipts to cut borrowing".
Reacting to Mr de Silguy's comments, Mr Jimmy Sommers, president of SIPTU, said the Government will have to make a choice "between honouring the current pay and tax agreement with the unions and maintaining the social partnership or accepting the advise of the EU Commission to shelve tax adjustments because of the risks of inflation".
"The absence of tax reductions can only lead to inflationary wage demands in order to give workers the improvement in living standards which they were promised under the terms of Partnership 2000," he said.
On the subject of European-wide economic performance, Mr de Silguy said that the EU's growth forecast for 1998 does not need to be revised, but 1999 figures "may need to be trimmed a little". "But the euro area is still likely to do better than any other major economic zone in the world thanks to strong domestic demand," he said. "The euro is not yet with us, but its positive impact is already apparent," he added. "By contrast to the turbulence of the early 1990s the eleven member states have enjoyed a high degree of exchange-rate stability in recent years," he stated.
The arrival of the euro will also mean significant changes for European stock markets, said Mr de Silguy. "For example there are currently 38 national stock markets in Europe and while they usually have a very strong grip on their home markets they far outnumber the exchanges in the US," he said.
"The arrival of the euro will intensify a process of rationalisation which is already underway," he added.
