74 March 2015
E
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