March 16, 2015
Over the past year, the euro is 25 per cent down against the dollar – our main trading partner. This is the currency that was supposed to bring stability to Ireland. Losing a quarter of your value in 12 months is hardly stability, now, is it?
In fact, our 15 years’ experience with the euro have been 15 years of massive economic instability. It has been a chaotic period of seven years of unsustainable boom, followed by a year of meltdown and then seven more years of recession, unemployment, emigration and public service cutbacks.
The only reason the economy is growing strongly now is because England and America – our major trading partners – are growing strongly. When you hear politicians talking about the Irish economy, and saying we are the fastest growing economy in Europe, it is meaningless, because we aren’t a European economy at all. We are an Anglo/American economy, with a European exchange somehow grafted onto us.
In pure economics terms, it is inexplicable that Ireland uses the euro as its currency, because when you stand back and look at things coldly, it is clear that it has been an unmitigated disaster for us. The exchange rate is the most important price in any economy, particularly a trading economy like ours, and yet we gave away control over it without any real national discussion about this momentous move.
The euro was the primary cause for the property boom because Irish interest rates remained far too low when the economy was growing far too fast, facilitating all the borrowing. The Irish exchange rate remained far too low too, which meant cheap foreign goods flooded in, pricing local products out of the market and driving the trade balance towards deficit.
The overvalued exchange rate also meant that it was almost impossible for Irish indigenous exporters to compete. Besides the multinationals, there isn’t an exporting base to speak of – 90 per cent of Irish exports are from the multinational sector.
And in the euro, the banks could borrow as much as they wanted from the rest of the eurozone with no exchange rate risk. The lenders misdiagnosed no exchange rate risk for no risk and the borrowers – the banks – exposed themselves to massive liability risk because all this money flowing into the banks was ‘hot money’. When you finance with ‘hot money’, it’s not a matter of if the money leaves, but when it does.
Finally, the regulators who were asleep at the wheel were, I believe, more likely to be all the more somnambulant because we were in a currency union, with all the talk of the ‘protection’ of the euro.
The euro didn’t protect Ireland: it exposed us. Then in the bust, when interest rates should have fallen and the exchange rate should have fallen immediately, they both actually rose – thus exacerbating the shock. The currency should have collapsed to ease the adjustment; it didn’t. The Central Bank should have engineered inflation to reduce the real cost of massive personal and corporate debts; it didn’t.
The cost of this was a much deeper recession than was necessary, much higher unemployment than was necessary and much higher emigration than was necessary.
Amazingly, after nearly 35 years of trying to tie our currency to that of Germany and France (as we first embarked on this lunacy in 1979), we still do the vast majority of our trade with Britain and the US. The idea was that tying our currency would make our economy operate in the continental cycle – it doesn’t. It never has and never will.
When our people lose their jobs, they don’t go looking for work in Germany or France, they go to England and the English-speaking world – as we have always done. By far and away the majority of our inward investment comes from America. This American dominance has increased in recent years – not because of the euro, but because we speak English, have low taxes and have an American culture, which makes it both attractive for American capital and attractive for European talent to immigrate here.
It has nothing to do with the currency. If it had, why does Britain still get far more not just American but total foreign direct investment than anywhere in Europe?
So why did we join a currency that we have no business being in? It was, and still is, political. Over the years, the political establishment has disliked everything British and has wanted to re-orient the country towards an imaginary link with continental Europe that never existed. We have always been an Atlantic race, we are not continental. With the exception of Finland, Ireland is the only non-continental member of the EU in the euro.
Today, being part of the euro makes little sense. The currency is collapsing today because Europe is in a deflationary mess and Britain and the US are growing. In the future it will probably rebound – and all the while, Irish entrepreneurs have to deal with different prices, making business harder, not easier.
Yet the upper echelons of the Irish public sector and most ‘respectable people’ believe that being in the euro is a good thing, despite the overwhelming economic evidence to the contrary. The euro being a good thing is now conventional wisdom. And when an idea becomes conventional wisdom, it is extremely difficult to change it, because so many so-called ‘serious’ people have lined up behind it.
As the wonderful JK Galbraith noted, when serious people “are faced with the choice between changing their minds and finding the proof that there is no need to do so, they invariably get busy looking for the proof”.
As a result there is no debate, and those who suggest that the emperor has no clothes are dismissed as mavericks or cranks – or, worse still, they are accused, in the ultimate putdown deployed by serious people, of guess what? Not being serious.
But this is deadly serious. Because there is no way Ireland can foster an indigenous, wealth-creating exporting sector when we have no exchange rate certainty.
So who benefits? Clearly those people who are well paid in euro, but could never generate this income and this lifestyle if they had to earn it in the competitive marketplace where they export and compete for their services against the best elsewhere.
Who might these people be? Why, the very senior civil servants who pay themselves excessively in a currency they could never hope to earn.
Is it any surprise that the policy elite love the euro? It makes them rich and, more interestingly, it makes them comfortably rich. They are Ireland’s “rentier” class – a drone elite that gouges rent from the productive class. Meanwhile, the people – Irish entrepreneurs – who have to export to actually earn their keep, can’t do so.
If the Greek crisis caused a break-up, we should be first out the door. But guess what – if the euro did break up, Ireland would be the last to leave, clinging on to Germany begging for respectability.