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Monday, 15th April 2024
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Big turnout for Duisenberg lecture Back  
While Duisenberg’s speech was headlined as delivering a strong warning to Ireland not to engage in pro-cyclical fiscal policy, comment around the tables was that there was really little news in that message,
Over 500 people gathered for the annual dinner of the Financial Services Industry Association in September to hear ECB President Wim Duisenberg deliver what some people described as an economics lecture from student days on inflation differentials in a single currency zone.

The attendance was up 25 per cent, said Roy Douglas, vice-Chairman of the FSIA, joking, for the benefit of the main speaker, ‘if only we could say the same about the euro’.

While Duisenberg’s speech was headlined as delivering a strong warning to Ireland not to engage in pro-cyclical fiscal policy, comment around the tables was that there was really little news in that message, since it had been given numerous times before. ‘A limp-handed slap on the wrist, perhaps’, quipped one representative of the international press. The wire services, sent on a mission to find a market moving comment from the ECB president, went away disappointed as Duisenberg barely mentioned the euro at all.

One unscripted remark, about Netherlands and Ireland enjoying something of a ‘free ride’ on eurozone inflation and interest rates, was seized upon, for the very fact that it was unscripted. But what did it mean? People were somewhat perplexed, leaving it to the economists to pick over the full text afterwards.

In comparison to an unscripted remark about the euro which would have kept the newswires, the currency traders and the London editors busy, remarks about Irish inflation were seen market irrelevant. A reference to Irish and Dutch soccer contests was also unlikely to move the markets, but ECB watchers may yet detect a trend in Duisenberg’s repeated asides about his national team’s disappointing performance.

The speech delivered by the ECB President was, in fact, a useful ‘elaboration’ of some of the issues which would help decide whether an inflation differential, such as Ireland’s or Spain’s, within the eurozone, mattered. A good, even dominant part, of the speech set out the conditions in which a differential would not matter, and to those who are familiar with the Irish economy, many of the conditions are present in Ireland.

Duisenberg’s call for the eurozone countries to liberalise further labour, product and capital markets would have reminded those who follow the Irish economic story closely that Ireland is already one of the most liberal in Europe in those areas. Duisenberg highlighted also that small countries have to do more than larger countries to open their markets, a view that will give some element of comfort to the Irish Government.

It could even balance out the warning about pro-cyclical fiscal policy. While Duisenberg repeated this warning, he did not make the next step to say that tax cuts should be postponed. He did not comment on how in Ireland the connections actually operate between tax cuts, the propensity to consume versus save, the impact on domestic demand and the resulting inflation effect. His speech was, as many remarked on the night, a solid lecture reminding people of general propositions with as much, if not more, relevance for larger eurozone countries battling with inflexible markets. The specifics for Ireland were left to the Irish themselves.

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