ABSTRACT
This conforms closely to the industrial relations structures that Calmfors and Driffill (1988) associate with the poorest macroeconomic outcomes. The macroeconomic errors of the 1970s and 1980s further reduced the potential for real convergence. The cohesion countries found it particularly difficult to rein in macroeconomic policy in the wake of the oil shocks of the 1970s (as evidenced by substantial inflation differentials and fiscal deficits relative to the rest of Western Europe), while a surge in wage demands – though associated with the return to democracy in Greece, Spain and Portugal – also occurred in Ireland around this time.2 The first oil shock saw Ireland break the budgetary ‘Golden Rule’ against running a deficit on the government current account. Once broken, it proved difficult to re-establish. Even after the oil-induced recession had passed, fiscal policy remained expansionary, though it was by now strongly pro-cyclical, giving rise to the rapid real wage growth mentioned above.3 With the jump in world interest rates in the early 1980s and a slowdown in the UK economy (the primary destination for Irish emigrants), Irish unemployment grew, debt-service and social welfare payments soared, and the debt ratio spiralled out of control. Government attempts at stabilisation through tax increases were thwarted as the tax burden fuelled wage demands, with knock-on effects on unemployment. By the mid-1980s Ireland was in severe crisis. The unemployment rate stood at 17 per cent of the labour force and government debt rose to 120 per cent of GDP. No one at the time could have foreseen that a fortuitous combination of policy-induced changes and beneficial external shocks would create the conditions, within the space of a mere few years, for the economic dynamism of the 1990s and beyond.
