In a currency union, with no homegrown currency to devalue (relative to your main trading partners), internal price deflation is really the only option for addressing a proce competitiveness problem. But (as I explain here) this is a very difficult road to follow as the Irish government are currently discovering. Excesses on the upside were easy, and (more or less) popular, but on the downside they are another matter altogether.
The Irish government is facing growing calls to abandon the centrepiece of its economic recovery plan after large-scale public protests at the weekend organised by the main trade unions.
A controversial proposal to impose a levy on the pensions of public servants â€“ effectively a pay cut for the 350,000 state employees from ministers to local authority workers â€“ drew 100,000 ordinary people on to the Dublin streets on Saturday in a protest organised by the Irish Congress of Trade Unions.
The levy is the centrepiece of an economic stabilisation programme announced last month aimed at curbing a ballooning budget deficit which, even with the proposed savings, is set to reach 9.5 per cent of gross domestic product this year. This is more than three times the fiscal benchmark set by the European Union.