January 10, 2010
When you think about Lisdoonvarna, what comes to mind? If you are of a certain generation, it’s probably the first music festival you went to. The weekend was immortalised by Christy Moore’s iconic song, Lisdoonvarna, which included the fabulously evocative line: ‘‘Anyone for the last Choc Ice?” For others, Lisdoonvarna is famous for match making.
The arranged marriage was a feature of our society for centuries and, therefore, the ‘matchmaker’ was a significant person in traditional Irish communities.
The matchmaker gauged whether couples were suitable or not. He met the future husband and wife and undertook a general checklist of essential attributes.
Having done this, he deemed whether or not they were suitable. If he was happy with the match, there was a good chance that the marriage would work. In a world of no divorce, it was crucial to minimise the risk of separation.
Joining a currency union is the economic equivalent of a marriage. If a country decides to give up its currency and get into bed with another currency, it would seem ludicrous to entertain this move without being sure that the union was suitable. As we all know, there is a difference between fancying someone and making the thing last.
To avoid single currency arrangements going sour, there is also a ‘matchmaker’ in economic theory. The economic matchmaker goes by the typically incomprehensible name of the ‘optimal currency area theory’. This theory is a checklist of economic attributes which need to line up in order for a monetary union to work.
For a currency union to work for a country, the most important thing is that the country trades overwhelmingly with the other members of the monetary union.
This ensures that all the countries in the union move roughly in the same economic cycle. It is also important that the structures of the respective economies are broadly similar, so that one country doesn’t experience a huge boom, while the rest are just motoring along nicely.
Having similar structures in banking and housing, for example, will imply that a country should not suffer a monumental bust, while the others are merely experiencing a normal recession. Equally, it is important that there is significant movement of people within the currency union – like there is in the US between its states – so that, if a country does slump, its citizens can move to find work in another member country.
In general, for a currency union to work, there should also be a single fiscal policy so that, when one area of the currency slumps, the rest of the union’s taxes go some way to ease the problems in the region in difficulty. This is how the currency unions in the US, Canada and Australia work.
Guess what? None of these attributes was in place when Ireland joined the EU economic and monetary union (EMU) and the euro. So it is clear that we didn’t join for economic reasons. So why did we join? It seems that we were too insecure to behave logically and this national insecurity – particularly among our senior mandarins – prevented us from having a debate.
Could it be that the people who dictate policy in this country are so in awe of the ‘big boys’ in Europe, and so desperate to be in the club, that they signed up for EMU just to be in the big league? Could it be that they didn’t have the confidence to question whether they should be in the marriage in the first place?
The reason we should ask these questions is that it is clear the euro has been a disaster for Ireland, and will ensure our slump lasts considerably longer than it has to. When we look at other countries, we see that, of the three entrants into the then EEC in 1973,we are the only ones using the euro. However, we trade less with other eurozone countries than either Denmark or Britain.
The Danes and the British had the confidence to know that they would still be full members of the EU without the euro. They kept their own currencies because they knew they’d need them at times like this. The Swedes made the same decision. They assessed the risks and concluded that monetary union was not for them.
In fact, when you examine the EU, you see that many countries have opted out.
There are four distinct exchange rate regimes operating with the EU. First, the euro members; secondly, Britain and Sweden, which float their currencies; thirdly, Denmark, Poland, the Czech Republic and Hungary, which are tied informally to the euro but can devalue in a crisis; and fourth, the Baltic States, which have a currency board with the euro – which means that they need to keep euro in the vaults of their central banks so that the local currencies are totally convertible.
Even with these four distinct exchange rate arrangements, the union still works fine.
Ireland doesn’t belong in the euro. That is abundantly clear from the queues of Irish people who choose to shop in the North. Irish people shop in Newry, not Nuremberg. We are locked into an arrangement which means we have to try to be more competitive than Germany. But no one is more competitive than Germany – it is the world’s most successful exporter.
So the question I have for those who rightly suggest that we need to get our wages and prices down by 30 per cent to claw back the competitive losses we suffered since joining the euro is: how are we going to do it? In particular, how are we going to do this without leaving the euro?
What is the alternative to leaving the euro? How high does unemployment have to go for us to be competitive again?
If there is an alternative way to get costs down which doesn’t involve changing the currency, and that doesn’t involve massive unemployment and job losses in the trading part of our economy, I would love to hear it. Irish wages are not that flexible, despite the spin being put out.
Think about it. Irish wages, on aggregate, rose last year when the economy contracted by 9 per cent. If we can’t get wages down when we are in such dire straits, how are we going to grind down wages in the next few years?
I realise that even talking about leaving the euro is heresy to the mainstream in Ireland, who try to dismiss this suggestion as the nuclear option, one which would have dreadful political and economic ramifications for us. To them, the question has to be: what is the alternative?
And, more crucially, if they can point to a welfare state like Ireland with a young population which has managed a 30 per cent cut in real wages so that it traded its way out of a recession, I will accept that it can be done.
Until those questions are answered, there will be significant question marks over the wisdom of Ireland using the euro. We need a break. We can’t keep cutting expenditure when there is no offsetting stimulus coming from a cheaper exchange rate, which allows the trading sector to grow. This is basic economics, the sort of stuff you learn in first year.
We know that there was no way Ireland would have joined the euro had we applied even the most basic criteria for suitability.
Are we expected to remain in this loveless marriage? As we saw in the past decades, divorces are now part of life. Ireland is, today, in a bad marriage – with no divorce.
Like those Catholic fundamentalists who suggested that divorce would threaten the fabric of our society, the euro fundamentalists who run policy in Ireland suggest that, to leave the euro, would undermine the fabric of our economy. Like all fundamentalists, the thing they hate most is a sceptic. Lets hear it for the sceptics.