Vol. 486 No. 1
117 Mr. D. Carey asked the Minister for Finance the instruments of policy which he believes will be available to the Department of Finance to counteract shocks to the economy after EMU entry on 1 January 1999; the plans, if any, he has to have discussions with the social partners to establish their willingness to put alternative options in place; and if he will make a statement on the matter. [1908/98]
In addressing this question it is valuable at the outset to differentiate between various types of shocks which are likely to be experienced under EMU. A clear distinction should be drawn between economic shocks which impact across the euro area as a whole — so called common shocks and — those which may impact disproportionately on one area or region what are termed asymmetric shocks.
In EMU, monetary and exchange rate shocks will be eliminated among participating member states by the adoption of a common monetary policy. Monetary policy will be set by the European Central Bank for the euro zone as a whole in response to prevailing economic conditions in the euro area and reflecting the impact of common economic shocks experienced across the euro area — subject to the overriding objective of price stability.
As far as asymmetric or regional shocks affecting Ireland alone are concerned, it is important to be aware that these type of disturbances are a good deal less likely to occur in EMU than in the past.
Since Ireland joined the EEC in 1973 there has been a marked change in the structure, pattern of economic integration and adjustment of the Irish economy in line with the European economies. As Ireland's integration with the rest of the EU has deepened so too has the rate of convergence. Completion of the Single European Market, through the establishment of the euro zone, will accelerate the real convergence of Ireland with its euro partners, thereby increasing the correlation of economic shocks affecting Ireland with those to which the euro area as a whole are subject.
As far as the availability of policy instruments to address economic shocks in EMU is concerned, strict adherence to the terms of the stability and growth pact will allow a member state participating in EMU to use budgetary policy when appropriate to attenuate the impact of the shock on the economy. The pact sets out sound budgetary objectives which will ensure that fiscal flexibility is used in the most efficient and beneficial manner. It has been adopted on the basis that sound public finances are a prerequisite to achieving conditions of macro-economic stability and for securing strong and sustainable growth in output and employment.
However, budgetary policy, particularly in a small open economy is not the only means by which adjustments can be made to accommodate economic shocks. It is vital that we achieve sufficient overall flexibility in the economy in order to facilitate the adjustment to economic shocks or disturbances which affect Ireland's international competitiveness.
