“HARD DECISIONS” will have to be taken to overcome the “severe challenges” facing the Irish economy, the president of the European Central Bank (ECB), Jean-Claude Trichet, said in Dublin yesterday.
Mr Trichet told members of the Institute of International and European Affairs (IIEA) think tank that he was “optimistic” about the prospects for the Irish economy, but he cautioned that the Government must adopt an economic policy that “convincingly reduces future public deficits” and recovers lost competitiveness.
Repeating his call for wage restraint, Mr Trichet said it was vital that euro zone governments and social partners take account of competitiveness and labour market conditions when setting wages “in a responsible and timely manner”, while national authorities should “pursue courageous policies of spending restraint” in order to minimise job losses.
“Unemployment is a clear concern right now in many parts of the euro area, and we surely do not want to lose human capital or scar a large proportion of the people of working age,” Mr Trichet said.
The ECB president also called on governments to resist introducing measures that hinder free competition, cross-border trade and protectionist measures. He said reforms under the Lisbon agenda must be implemented to improve the euro zone’s long-term growth prospects.
Turning directly to Ireland, Mr Trichet said advantages such as the Irish economy’s openness to trade, a high degree of flexibility, a business-friendly regulatory environment and a skilled workforce had not been lost as a result of the global financial crisis, but the unprecedented international economic shock had come at the same time as the Irish economy’s necessary rebalancing.
“Some things will, of course, have to change. But none of the positive characteristics are lost nor should they be lost in the crisis,” he concluded.
The Irish economy will be “well placed” to benefit from the eventual recovery in the global economy because of its open nature, he said.
The European Commission has initiated disciplinary procedures against Ireland, France, Greece, Latvia, Malta and Spain for running excessive public deficits.
Mr Trichet did not comment on monetary policy in the euro zone, which is expected to take a momentous turn next Thursday when the ECB governing council meets in Frankfurt.
After keeping its key lending rate steady at 2 per cent earlier this month, the ECB is widely expected to announce a half-point cut in interest rates, which would take euro zone rates down to a historic low of 1.5 per cent.
The IIEA welcomed remarks made by Mr Trichet in Paris last week that to speak of any particular country as a weak link in the euro zone would be an “error of judgement”.
In a statement, the IIEA Working Group said the cost of Government borrowing could be “mitigated by a positive gesture” from the ECB.
It is feared that the Government may have to seek aid from Europe if it fails to narrow its budget deficit.
The cost of protecting Irish government bonds from default has almost doubled this year in the credit-default swaps market amid concerns that the State may struggle to make its repayments as the economy shrinks and the deficit swells.
In a speech concentrating on both the external and internal competitiveness of the euro zone, Mr Trichet said “competitiveness” was a disconcerting word to many people as it suggested pressures to change that could have personal and social costs.
But he added that countries in which highly productive firms can thrive were likely to do better in terms of their overall export performance.
Some countries, Mr Trichet said, had seen their labour costs increase as a result of strong growth in domestic demand that was “related to expectations of consumers or firms about future income and profit prospects, which, it is now clear, were overly optimistic”.
