Was joining the €uro really a good idea?
By The Insider
The fallout from the most dramatic economic collapse imaginable over these past three years, coming after the incredible highs of more than a decade of the fabled or now much-maligned ‘Celtic Tiger’, has produced plenty of reviews and reassessments of that period in Irish history and of the decisions taken.
Most of the attention has focused on the domestic policy of Irish governments in that time - the slashing of taxes, ramping up of public expenditure to buy votes, the excessive focus on the construction sector, and poor (some would say non-existent) banking regulation, for instance.
One absolutely critical policy decision that has not received as much attention, however, is that taken to join the European single currency. In future when historians review this period in Irish history, that decision will surely be critical in gaining an understanding of the period.
The euro: milestone or millstone?
When Ireland took the decision to join in 1997 it was with the support of virtually all parties represented in the Dáil and most of the civic groups and social partners. It was seen as a step forward for Ireland and a reassertion of our independence, even if there was some concern about joining while Britain remained outside the euro.
While the issue still has not crept to the top of the political debate, much of the focus in this area has centred on two aspects:
a) the role the objective of securing and defending the currency has played in imposing a harsh package of austerity on the Irish public, and
b) the role the currency played in setting the economy, notably the housing sector, on fire in the first place.
Many have noted that the pressure to balance budgets has come largely from the EU. There have been claims that last November’s bailout was forced on Ireland as the EU is largely concerned with ensuring the survival of European banks that lent vast sums of money to the State.
On a political level it will be fascinating to see how this plays out in coming years and how it might impact on Ireland’s relationship with the EU.
Certainly the role of the EU and its decision-making must be scrutinised, but there is a danger that people may take advantage of this feeling to deflect attention from the domestic role in the creation of the crisis and the need to take measures to ensure such actions never happen again.
After all, should it take the EU to apply pressure to ensure that Irish politicians balance the Budget and put the economy on a sustainable footing for instance?
Setting the economy on fire
Many people now rue the role that the European Central Bank’s interest rate policy has played in the Irish economy. When Ireland was booming and could do with higher rates, Germany was stagnant and so rates were cut. Now with Ireland mired in a deep recession and in need of stimulus, rates are being increased again.
While there is merit to this economic argument Insider finds it a little simplistic. Let us consider what would have happened had the ECB not been setting interest rates in Ireland in the past decade.
Who would have? In one word, Bertie. Do people really feel that, based on what we now know, Bertie’s governments would have acted in the greater economic interest and resisted the temptation to buy votes with interest rate policy? They hardly did so in any other sphere and there is no reason to think that interest rate policy would have been any different. Furthermore do people really feel that the Irish Central Bank has given any indication that it would have proven any more adept than the ECB in managing these matters?
It is also worth noting that in the period since house price inflation started to emerge in the mid-1990s, the year in which the most dramatic increase in house prices occurred was 1998.
House prices increased by 30 per cent that year. Even in the aftermath of what was an incredible and crazy bubble that still looks like a remarkable figure today. Why is 1998 significant in the context of the euro? Because it was the last year of the truly independent Irish punt.
This takes Insider nicely to the next aspect he wishes to consider – the period leading up to the introduction of the euro and the decisions taken at that time, both here and in Europe.
Introduction of the euro
Readers will recall the notes and coins hitting the streets on New Year’s Day 2002 – but the real key date was January 1 1999, the date the exchange rates at which each country joined the currency were fixed.
The final decision regarding the rate at which Ireland would join the euro was taken in a very casual manner – it is said that then Finance Minister Charlie McCreevy mentioned to Bertie Ahern on a Sunday in March 1998 - while the latter was canvassing outside church gates for the Dublin North by-election - that he was going to announce the decision the next day.
There has long been a lingering feeling that Ireland joined at slightly too favourable a rate and that this fuelled further excessive growth that became unsustainable over time.
Let us now focus on the European picture at the time. Other than those countries that did not wish to join, there seemed to be eagerness among the EU powers that all other Member States should join.
There were supposedly stringent criteria for entry to the currency but the decision to include Italy among that first group in 1999 – and indeed to include Greece in 2001 – when neither country appeared to meet these criteria, gives weight to the theory that the project was as heavily political as much as economic.
Clearly then there were errors made both here and in Europe in the lead-up to the introduction of the currency.
The future and lessons to be learned
A real danger for Ireland is to pass off the disasters of recent years as something manufactured abroad. We have seen above how the inability and unwillingness of Bertie Ahern’s governments to put the economy on a sustainable footing played such a role in creating this crisis. It could also be argued, however, that the Irish public showed themselves far too willing to be bought at election time.
What can be done to ensure that in future Irish voters will value decisions that put the economy on a sound footing over short-term decisions designed to buy votes?
Equally Europhiles must resist the temptation to laud the role played by the ECB in keeping Irish banks afloat at the expense of questioning some of the decisions taken in recent years at European level.
An even more complex question is how Ireland’s relationship with the EU will play in future and in particular, if deeper integration is required to make the single currency project work.
Ireland and Europe, as noted above, both have lessons to learn from the whole experience and it may well be that greater co-operation will be required and perhaps more pooling of economic sovereignty to ensure this type of crisis doesn’t recur. How this plays out will be interesting.
In summary, Insider would hope for a more honest reappraisal at home and abroad of the single currency project to date and also of the role domestic policy played in creating this crisis.
Unless the mistakes are identified and admitted to, both Ireland and Europe are surely destined to repeat them and another crisis will be created a generation down the line.