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Within EMU, the state of the balance of payments is a crucial signal of possible dangers in an economy. In the case of Ireland, this signal was ignored, and a failure of banking regulation together with wholly inappropriate fiscal policy allowed the current crisis to happen. In the aftermath of the recession, domestic costs have been cut, producing a substantial increase in tradable sector output. This output response will play a crucial role in eventually returning the economy to growth. Tackling the huge government deficit will be necessarily painful and, until completed, will weigh heavily on domestic demand, delaying a full recovery. It will be important that the fiscal adjustment is undertaken in an 'employment-friendly' manner. [ABSTRACT FROM AUTHOR]