Policy responses to a possible economic shock in EMU 

The question of possible economic shocks in EMU must also be considered. There are two distinct types of such shocks. First there is a shock which would affect the whole EMU area. Such a shock would be dealt with jointly by the Member States and the relevant Community institutions, including the ECB.  

Secondly there is a shock which would affect Ireland in particular. A successful response to such a shock would depend to a large extent on how well the Irish economy had prepared itself in advance. The use of interest and exchange rates as economic instruments to deal with shocks which are particular to Ireland is no longer available in EMU. This means that if there are shocks in the future the adjustment process will have to be assisted by a combination of fiscal policy, pay policy and structural reform.  

The terms of the Stability and Growth Pact, requiring a Member State to achieve a budgetary position of close to balance or surplus in normal economic conditions, can allow fiscal policy to help stabilise the economy following an economic shock. Indeed, one of the main objectives of the Pact is to help ensure that, by provision being made in good economic times, sufficient flexibility will exist in bad times to allow fiscal policy to be used to help cope with the problems that might then exist. A medium-term budgetary objective of being "close to balance or in surplus" will, of course, require the continued adoption of prudent policies in relation to the rate of growth in public expenditure, and appropriate tax policy within the overall framework of Partnership 2000.  

Enhanced competitiveness has an important role to play in the economy's capacity to accommodate economic shocks successfully. Ireland's competitive position in recent years has been strong. It stems from a strategic framework built, inter alia, on a consensus approach which brings the social partners into the national goal-setting arena; sound fiscal and economic policies pursued by successive Governments; and a long-established investment in education. This is translating into strong employment growth, a continuous decline in unemployment and increased national resources to tackle social priorities.  

Provided our competitiveness is maintained, disturbances can be absorbed more readily by appropriate adjustment to domestic costs and prices. The social partnership arrangements are important in this regard, in providing a framework for both long-term competitive labour cost development and for strategic and dynamic responses to shocks, such as the provision for review under Partnership 2000. Also important are the maintenance of competition in product markets and the development of suitable infrastructure - both "hard" (physical infrastructure) and "soft" (social infrastructure, e.g. public services and the regulatory framework; the skills and knowledge base; and information management).  

Ultimately, private sector preparation for possible shocks in EMU is, like all issues of competitiveness in the market place, primarily a matter for individual companies themselves. Considerable progress is being made in making companies aware of the issues which deserve attention in this context.