EurOMG! - Village Magazine

74 March 2015

CONOMIST John Fitzgerald

of the ESRI told the Oireach-

tas Banking Inquiry that his

mistake in not foreseeing the

banking crash “would follow

him to the grave”. One wonders does

he regret his own and the ESRI’s advo-

cacy of joining the Eurozone in the ﬁrst

place, way back in 1999, from which our

banking and debt debacle stemmed? Is

not that fatal step what really needs a

public inquiry into?

Future historians are likely to regard

the abolition of the Irish pound and

our joining the Eurozone as the big-

gest mistake ever made by the Irish

State. It was as if when policy-makers

in the Department of Finance and Cen-

tral Bank decided to adopt the euro,

they felt freed from their responsibili-

ties as ﬁnancial guardians of a State and

decided to go for a pint! Unsurprisingly,

people involved in that decision like to

keep their heads down.

In 1999 most local economists

opposed our joining the Eurozone with-

out the UK, our most important single

EurOMG!

The biggest mistake

ever made by the Irish

State?

By Anthony Coughlan

INTERNATIONAL EURO

March 2015 75

trading partner. George Lee, Jim Power,

Cliﬀ Taylor and others opposed it among

media economists; Brendan Walsh, Tony

Leddin, Moore McDowell and Sean Bar-

rett among the academics.

Animated by their usual uncritical

europhilia however, Ireland’s main-

stream politicians pushed ahead,

supported by uncritical press opinion.

They would show how communau-

taire they were by joining the Eurozone

before the Brits did. Was Britain joining

it not after all inevitable? But Britain did

not and will not.

Former Commission President

Romano Prodi said of the euro on its

establishment: “The two pillars of the

State are the sword and the currency,

and we have changed that.” So by abol-

ishing the Irish pound our mainstream

politicians toppled one of the two pil-

lars of the State they had been entrusted

with. Simultaneously they added a new

economic dimension to the North-South

border within Ireland.

And – folly of follies – they tied the

Republic’s fortunes to the currency of an

area with which it does just one-third of

its trade! Our most recent foreign trade

ﬁgures show this clearly – see Table 1,

If the Irish economy is improving

these days, it is because America and

Britain with which we do most of our

trade are improving. The Eurozone

remains stuck in slump.

Abolishing the Irish pound deprived

the Irish State of the ability to restore

lost economic competitiveness by alter-

ing its exchange rate. It imposed on us

an unsuitably low interest rate regime

that was geared to the needs of the

larger Eurozone countries and was the

principal cause of the early-2000s prop-

erty bubble. When that bubble burst,

undermining our banks, Eurozone

membership subjected us to its German-

imposed austerity regime.

Paradoxically, the value of having its

own currency for a State that treasures

its independence was shown for Ire-

land in the years 1993-2000 before we

adopted the euro. These were the years

of the so-called “Celtic Tiger”. That

was the only period in the ninety-year

history of the Irish State that it followed

an independent exchange rate policy. In

those years Government management of

an eﬀectively ﬂoating currency enabled

it to give priority to the real economy

of maximising output and employ-

ment rather than maintaining a ﬁxed

exchange rate. For implicit exchange

rates are ﬁxed notionally for ever inside

a monetary union, like the one we used

have with the UK and now have with the

Eurozone.

The highly competitive exchange rate

of the Celtic Tiger years was the princi-

pal factor underlying the export boom

and extraordinary high growth rates

of the later 1990s. Between 1993 and

1999 the Irish pound devalued from

110 pence sterling to a nominal 90

pence. There was a similar devaluation

against the dollar. What economists

term the real eﬀective exchange rate

was devalued even more, taking account

of our relative costs vis-a-vis our main

trading partners.

Apologists for the Republic’s adopting

the euro-currency are generally in denial

about the central role of an independ-

ent currency and exchange rate policy in

doubling Ireland’s growth rates in those

years. A raft of books and articles has

ascribed the Celtic Tiger phenomenon

to an earlier Irish devaluation in 1986,

There is

no sense

of common

‘Europeanness’

inside the

Eurozone,

comparable to

the national

solidarity

which exists

within each

Member State,

as the Greeks

are currently

discovering

“

Years Change %

1970-1986 +3.4

1987-1993 +3.9

(post-1986 devaluation, start of social partnership)

1994-2000 +8.6

(ﬂoating punt/”Celtic Tiger”)

2001-2007 +5.0

(euro-currency, early years)

2008-2013 - 1.2

(euro-currency, later years)

-34%

Source: CSO: National Income and Expenditure

Table 2: Average annual % change in the

Irish Republic’s real GDP

Eurozone UK USA & Rest of World

Exports 37% 16% 47%

Imports 28% 34% 38%

Combined Trade 33% 23% 44%

Source: Statistical Yearbook of Ireland, 2014

Table 1: Irish Trade by Area, 2013

76 March 2015

to national pay agreements between the

“social partners” from 1987 onward, to

the impact of EU structural funds post-

Maastricht and to the supposedly high

standard of Irish education compared to

other countries.

Most of these studies make only pass-

ing reference to the 1993 devaluation,

if they refer to it at all, for most of their

authors opposed that step and were

ideologically committed to joining the

Eurozone at the time. By coincidence, a

fall in the euro vis-à-vis the dollar and

sterling added to our competititiveness

in our ﬁrst years of euro-membership,

but then we decided that the secret of

economic growth was selling houses to

one another rather than exporting!

A glance at the growth ﬁgures for the

State’s Gross Domestic Product for the

various periods since 1970 shows what

really happened –see Table 2.

We now ﬁnd ourselves trapped inside

the Eurozone – a long way from “the

unfettered control of Irish destinies”

which the 1916 Rising sought to achieve

that we commemorate next year.

The Eurozone will not last of course.

Some 60 monetary unions dissolved

during the 20th century. Where now

is the USSR rouble, the Czechoslovak

crown, the Yugoslav dinar or the Austro-

Hungarian thaler? There is no example

in history of a lasting monetary union

that was not part of one State, with the

automatic transfers from the richer to

poorer areas of such a State which stem

from the common tax and public spend-

ing systems that all States possess. The

Eurozone possesses no such income

transfer system and there is no support

for establishing one. The cross-national

solidarity needed to underpin it does

not exist. There is no sense of common

“Europeanness” inside the Eurozone,

comparable to the national solidarity

which exists within each Member State,

that would induce Germany and other

creditor EU States to ﬁnance indeﬁnite

income transfers to the debtor States, as

the Greeks are currently discovering.

Those seeking a way forward to the

national economic independence which

is the only stable basis for real longlast-

ing prosperity should read economist

Cormac Lucey’s book published last

year: ‘Plan B - how leaving the euro can

save Ireland’. •

Anthony Coughlan is Associate Professor

Emeritus of Social Policy at Trinity College

Dublin

INTERNATIONAL EURO

The two pillars

of the State are

the sword and

the currency,

and we have

changed that

“

“Between January 1991 and October 2000 there was a gain in

competitiveness [for Ireland] of 39% relative to the US, 17.3% relative

to the UK and 15.8% against a basket of 56 trading countries... This

outcome is primarily driven by movements of the Irish pound exchange

rate (including the devaluation of 10% in January 1993) and more or

less coincides with the Celtic Tiger boom from 1994 to 2000.

However, driven by an appreciating euro exchange rate externally

and a wage-inﬂation spiral domestically, between October 2000 and

September 2009, a loss of price competitiveness of the following

magnitudes was recorded: 72% relative to the US, 60% relative to the

UK and 37% overall as measured by the real eﬀective exchange rate.

The Celtic Tiger came to a halt in 2001 and was replaced (due primarily

to low interest rates) by a boom in property and construction. Up until

2007 the economy continued to grow at over 4% per annum as the

property boom compensated for the loss of price competitiveness. When

the downturn ﬁnally arrived in 2007, the Irish economy was in a very

vulnerable position and this has manifested itself in an unprecedented

economic recession in 2009 . . . Outside of EMU, the Irish Central Bank

would most likely have raised interest rates in or around 2003 and

lending by domestic banks would have been constrained by their ability

to attract deposits . . . Given EMU membership, all of the key automatic

adjustment mechanisms – the interest rate, the exchange rate, even

elements of ﬁscal policy – are now outside of our policymakers’ control

and the burden of adjustment falls almost entirely on the labour market”

–

University of Limerick economist Anthony Leddin, in S Kinsella and A Leddin,

‘Understanding Ireland’s Economic Crisis’, Dublin 2010, p.175 and pp.283-4

Changing competitiveness before and after joining the euro