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Wall Street Journal

February 14, 2001

Review & Outlook:
Green With Envy

     The Bush Administration isn't the only Western government under fire for proposing pro-growth tax cuts. This week, European Union finance ministers voted to reprimand Ireland for its "high inflation rate" and its decision to carry on the corporate and individual tax cuts that have made it the EU's biggest success story. It's an outrageous slap at a member state and -- because it undermines EU unity -- foolish besides.

     Ireland has redesigned its entire economic model to produce mainly one thing -- growth. The EU model, on the other hand, seems to be about all sorts of things, but mainly about obeying its bureaucrats.

     To begin with, the joint communique is simply unfair. Ireland no longer has the highest price increase rate in the euro zone; that distinction belongs to the Netherlands. On the basis of "harmonized" statistics, Irish prices in January were up 3.9% from a year earlier, compared with 4.2% in Holland. (No reprimand is planned for the Dutch.)

     Worst of all, it appears the finance ministers have forgotten that inflation is a monetary, not a fiscal, phenomenon. But prices can rise for a host of other reasons, including plain old economic growth. As people become richer and demand more, businesses naturally will try to charge more. That is what is happening in Ireland, which has the highest growth rate and lowest unemployment rate in the euro zone. The Irish now have more purchasing power per person than the Germans.

     A weak euro also appears to be boosting Irish prices, through a series of unique and indirect means. Ireland is Europe's largest exporter of software, a booming business that brings in piles of pounds, dollars and yen. All of these currencies convert rather nicely into euros. Add to this that Ireland has a disproportionately large share of its trade with non-euro countries, principally the U.K and the U.S.

     By contrast, most other euro-zone nations do the bulk of their trade in euros. So Ireland gets a greater monetary boost from the weak euro than other euro-zone states and, partly as a result, prices rise to absorb the gains from trade. But all this obscures an important point here about genuine monetary integration: If the Irish punt were totally subsumed in the euro, no one would notice that prices were rising faster in Dublin than in Paris, or if they did they wouldn't think twice about it.

     So it is worth asking whether the finance ministers voting to condemn Ireland have a clue about what's making this island thrive and tick economically. Despite all the hot air coming out of the EU, there doesn't seem to be a storm cloud on Ireland's horizon. Irish Finance Minister Charlie McCreevy was busy this week passing out a telling economic chart. It shows that, as a percentage of gross domestic product, Ireland has the EU's biggest budget surplus, the second lowest amount of debt, the greatest reduction in government debt, the lowest level of government spending and lowest total taxes.

     Unlike its European neighbors, Ireland understands that lower taxes not only spur economic growth, but eventually lead to greater revenues. Remember, the Irish economy was a basket case in the late 1980s. Measured in terms of economic growth, Ireland has paddled itself from Europe to Asia. Other EU nations should figure out how to make similar moves, rather than faulting the navigator who is pointing the way.

     Come to think of it, when George W. Bush makes what undoubtedly will be a famous inaugural trip to Europe, he could do worse than begin it in Ireland.

     At least there he could have a soulful conversation with political leaders who share his ideas of growth and taxation, even as they have to fend off the kind of bean counters still found from Brussels to Capitol Hill.


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