Image via Wikipedia Not entirely sure how I missed this, but my colleague Dr Tony Leddin has a piece called How wage agreements eroded competitiveness in the Irish Times describing the recent history of Ireland's attempts to get to grips with the spiral of wage increases following inflation following wage agreements. It seems clear from the article that what Tony feels we need is quite severe wage moderation, to reduce inflation and make us more competitive relative to our export partners. We are told right away that
THE MOST comprehensive indicator of price competitiveness - the real effective exchange rate index - indicates that the Irish economy is now at its most uncompetitive since the early 1970s.
This is serious stuff, and the mechanism to get us out of this position of ever-increasing wage demands coupled to inflation is not entirely clear, because right now, I can't see any government calling for further wage restraint following the collapse of the pay talks earlier this summer. No other actor in the system has an incentive to change the status quo either.
What is clear is that we did achieve a deflationary, policy driven inflation moderation for a few years, so this has happened before---when Ireland wanted to gain entry to the European Monetary System, the precursor of the Euro system. Tony shows we did actually achieve inflation and wage moderation targets for a few years.
As Tony rightly points out, now we're in the Euro system, we can't devalue our currency and get out of the inflationary spiral that way. The only way to slow things down is to use fiscal policy---the government budget---and this will be unpleasant, because it means cutbacks.
On whether such an action is politically feasible, I'm not sure. On whether it is economically necessary, I am sure.
Check out the article itself for more information on this topic.
Update: the Irish Time server seems to be down. I've copied the text from my RSS reader below, just click on the 'read more' link to get access to the article.