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The Irish economic crisis and the EU: did they lead us over a cliff?
This article is an attempt to articulate a view that our EU, and particularly Monetary Union, membership has not been beneficial - and in fact ruinous - with respect to the current economic crisis. It is hoped by this to answer some of the criticisms of the Lisbon No campaign from commentators who claim that the opposite is the case (1).
It seems to this observer that there are two particular aspects to that membership which have contributed enormously to the dire economic straits that Ireland now finds itself in. These are the increasing globalisation of the Irish economy, that the EU has imposed on us, and secondly the negative consequences of having our exchange and interest rates set by Brussels according to the needs of the German and not the Irish economy:
"Of course Ireland should leave EMU, but as you and I know, there is no Irish politician with the vision or neck to even contemplate such a course of action. In Ireland's case, EMU was a victory for politics over economics and we have paid the price ever since. Ireland now finds itself tied into a German economy that is determined to emulate Japan." (10)There are plenty of other examples of this where Irish economists warned of the disasters ahead if we joined the Euro (11). Well we did join, under this pro EU political atmosphere, and the predicted disaster has simply come about. In fact I think you could say that the ECB has single handed destroyed the Irish economy - which was quite healthy before we joined it. The obvious pitfalls that the Irish economy faced when it joined the euro were threefold I think:
a) Firstly it locked us into ECB interest rate levels which were, and are, set according to the dictates of the German economy. So at a time when the Irish economy was already overheating we had to slash interest rates to ridiculously low levels on joining the Euro, low rates which continued and in turn gave us this ruinous property bubble. Don't forget that the Irish authorities knew that the economy was overheating, the Governor of the Central Bank said so (12), but now that the sovereignty of the Irish people over their economy had been stolen from them there was nothing he could do to prevent the disaster. The only surprising aspect was just how much the ECB set the rates according to the dictates of the German economy, even to the extent of raising interest rates last year as we collapsed, rather than even as a compromise between Germany and the outlining states. This has destroyed not only the Irish economy but also that of Spain, Greece and to a large extent Italy, a systematic destruction which has for some reason gone largely unmentioned in the mass media. The basic point is that all economists agree that it is disastrous to join a monetary union if you are joining an economy which operates according to a different business cycle from your own economy. This is very true of Ireland and Germany and made the disaster totally inevitable, and will continue to destroy the Irish economy until we leave the EMU, which is why some Irish economists are strongly urging the Irish government to do just that (13).
b) Obviously our border area is vulnerable to changes in the sterling rate, changes which while serious are nonetheless manageable so long as we have a native currency. The phenomenon is that when we had a native currency that currency would always rise and fall somewhat in synch with sterling, because the UK and Irish economies are so closely interlinked, which makes it unlikely that we would be effected too much by these movements. Consider a simple hypothetical case to see how this works. If for example sterling was undervalued against the Irish currency some consumers would buy purchases across the border and businesses would increase their imports of UK goods, both causing a sale of the Irish currency. This sale would then serve to bring down the Irish currency, pulling the two currencies back into alignment. The danger with joining the Euro was always that the exchange rate would be set according to conditions between the UK and Germany, Irish sales and purchases would have no effect on the currency movement. This always meant that Ireland could be completely hammered by these currency movements and, unlike in the previous scenario, there would be no alleviating currency trends to save us. The rate could change dramatically and we would be crushed in the middle.
And this is exactly what is happening. Many many Irish businesses have been wiped out by the huge currency changes between the Euro and Sterling - far greater changes than occurred when we had a native currency - and there is no end in sight. In fact there are dire predictions out there that Sterling might go to say 1.20 to the Euro (meaning you get 120 UK pence for every euro) which would pretty much wipe out every Irish retailer north of a line from Dublin to Galway. Just another of the economic disasters that the EU has inflicted on us!
c) The third point is that it prevents currency movements from alleviating economic shocks that we might have faced in the future. You see flexible exchange rates have for some reason got a bad press recently, the truth is these are good things especially for an economy that has faced some sudden economic blow. (I agree that too violent a fall in the value of a currency is often bad but I think capital controls is the best way to deal with that possibility. Once you have them in place a small country has nothing to fear from floating its currency.(14)) Exchange rate changes can frequently cushion the blow. Basically if an economy is doing badly its currency will usually fall which in turn can boost exports and competitiveness and help the economy recover. Some people say that that is what is happening in the UK, and even Iceland is now reaping the benefits of flexible exchange rates. Its being reported that tourism is now booming in Iceland, US bookings up 90% this winter (15), and the fishing industry is going from strength to strength (16), both boosted by the new exchange rate. Hence for Iceland having a flexible exchange rate has given them some hope of feeling their way out of their current troubles whereas in Ireland, locked to the Euro, the exchange rate and the economic downturn are both conspiring to destroy us, whereas usually these economic effects help to balance each other out.
But despite all that data you will still find a lot of people derive some vague sense of security from being in the euro. Why, it is hard to understand. The basic point here is that we have already crashed spectacularly as an economy over the course of the last few months. Its not the 80s we are talking about here, imho Irish economic history holds no comparable period since the Great Famine. If being in the EU, or the eurozone, protected us in any way we simply wouldn't have crashed as badly as we have done. Has being in the Euro prevented businesses from pulling out of Ireland? Eh no, actually in the case of Dell thats one of the reasons they left, because they can service the Irish market and the rest of Europe just as easily by being in Poland. Has being in the EU caused investors on the stock exchange etc to stay in the country? No, just look at Irish bank shares, nobody could realistically say that it would have been worse if we were outside the EU. The fact is that when we were not in the EU companies like the Bank of Ireland successfully traded all around the world for centuries, without any problems in terms of their standing nationally or internationally. The truth is that it is only since we have joined the EU that that company, and Ireland as a whole, looks like such a basket case. And in fact in international business circles they are beginning to realise that those countries which have lost control of their economies to the EU will never be able to recover from the economic disasters that the ECB and the EU are inflicting on them. Take this example from the business pages of the London Telegraph:
"Real interest rates of minus 2pc set by Frankfurt for German needs led to a Spanish property bubble of fearsome scale.Then the argument goes to Iceland, wouldn't we be as bad as them if we were outside the Euro? But we are in as bad a position as them, in some cases worse, and this happened while we were in the Euro so what kind of protection does it offer? If you compare the main Icelandic stock index, the OMX Iceland 15, with the Iseq Financial index in Ireland, you find that the former fell last year by 94% and the latter by 91%.(18) The Icelandic unemployment rate reached 3% in December and some pessimistic doomsayers are predicting as much as 10% for later this year (19). Irish unemployment is reckoned to hit 15% by this summer and 20% by next year.(20) The new Icelandic budget deficit for 2009 has been projected at 154 billion krona (up from 60 billion before the crash) which amounts to about 2,885 euro per person of extra debt that Iceland will now have to carry.(21) That might sound like a lot but bear in mind that many commentators are predicting an Irish budget deficit of 20 billion euro for 2009 which gives you an extra debt load for each Irish person of c.4,444 euro for this year (22). Hence again this idea that only for the EU we would be as bad as Iceland doesn't stack up, it makes more sense for Icelandic people to say it could be worse, if we were in the EU we would be completely ruined and as bad as Ireland!lol
Anyway my basic contention is that it was an EU controlled Irish economy that has hit the rocks so disastrously over the last few months. All the indications are that if we had control over our economic destiny our economic problems would never - and did never while we had an independent currency etc - have reached the heights that they are now at. All the major economic levers were at the time of this disaster entirely under the EU's control. Some people say for example that we should have had a different regulatory environment, a good idea but the fact is that our financial regulatory structure was entirely designed by the EU which compelled us to introduce the Consumer Credit Act to meet an EU directive (23). Some people say that we should have restricted credit to housebuyers somehow without changing the interest rate, again EU rules stopped that.(24) Therefore the reality is that the more the EU's power has grown over Ireland the less we can control our own economic destiny, and hence the less capable we are to solve our economic problems. This should be borne in mind when you are asked to throw away the few threads of our independence left by agreeing to the Lisbon Treaty.
1. A challenge put by Frank and Kevin Murphy here: http://www.indymedia.ie/article/90534 .
2. http://www.forumoneurope.ie/index.asp?locID=508&docID=1598 and: http://findarticles.com/p/articles/mi_qn4158/is_1995071...94041 .
3. See for example how well they worked for Malaysia during the Asian financial crisis: http://diskopi.wordpress.com/2008/11/22/did-capital-con...ysia/ and http://ksghome.harvard.edu/~drodrik/Malaysia%20controls.PDF .
4. http://krugman.blogs.nytimes.com/2008/04/09/the-plot-ag...land/ and:
5. http://www.irishtimes.com/newspaper/opinion/2009/0120/1....html .
6. http://www.law-essays-uk.com/2-1-essays/Article-28-ECT.php .
7. http://www.indymedia.ie/article/88140#comment239045 footnote 11.
8. http://news.bbc.co.uk/2/hi/africa/7653846.stm and http://www.express.co.uk/posts/view/65628/Secret-plot-t...to-EU .
9. 'Halo' at politics.ie:
"Government job in rathmines, big swimming pool, was in there couple of weeks ago and it is full of foreigners, yes mostly employed by subbies but it is just yet another example." ( http://www.politics.ie/economy/39846-immigrant-workers-....html ), and by the same writer:
"Dublin airport is fecking disgrace, an outrage. the biggest fecking construction job in the country and nearly 80% of the workforce are foreign."
( http://www.politics.ie/economy/39846-immigrant-workers-....html )
10. http://www.irishtimes.com/focus/iraq/questionsandanswer...s.htm . More from Jim Power:
"I think the Irish people don't realise at this stage that from next January 17 people, including one Irish person, will be making the interest rate decisions for Ireland in Frankfurt, and Ireland, at the end of the day, will have very little influence over the levels of interest rates which we will have to live with. I think there is not a realisation of that and once that realisation strikes home I think people could be in for a little bit of a shock."
( http://news.bbc.co.uk/1/hi/events/the_launch_of_emu/ins...9.stm )
He must have felt vindicated by 2008:
"But some economists believe that signing up to the euro was a huge economic mistake for Ireland. Power describes it as a victory of politics over economics, and says that even to question Ireland's entry was politically taboo.
Bloxham Stockbrokers' Alan McQuaid argues that Ireland should have kept its alignment to the British pound.
"Ironically, at the time we joined the euro, we were moving politically closer to Britain.
"I think our prospects would have been better if we had stayed pegged to their currency -- first, because the British economy is stronger, and, secondly, because the Bank of England is far better than the ECB."" ( Sunday Business Post 5 January 2008 http://archives.tcm.ie/businesspost/2003/01/05/story130...8.asp )
11. For example UCD economist Peter Neary writing before we entered:
"It is not difficult to see that Ireland and the core economies of continental Europe make an odd partnership in the absence of the UK. In academic jargon, they fail to meet the criteria for an "optimum currency area".
Standard arguments suggest that monetary unions should work best between countries with flexible labour markets, high levels of labour mobility, extensive mutual trade and exposure to similar external shocks. Ireland and the UK together meet the labour mobility and mutual trade tests whereas Ireland and the rest of the EU without the UK probably fail all. More serious from the perspective of coping with asymmetric shocks is the absence of any system of compensating income transfers. Within existing monetary unions such as the USA, such transfers serve to cushion declining regions: individual states which suffer localised recessions get some automatic federal assistance. Not only is there no provision for such transfers in the EU, but the “Stability Pact” (agreed at the Dublin summit in December 1996 and scheduled for ratification at the Amsterdam summit) in effect proposes pro-cyclical transfers: countries with severe budgetary deficits may be fined even when these arise from local recessions which lower tax revenue and raise welfare payments.
As against all this, it is often noted that the UK’s share in Ireland’s exports has been in decline for decades and is now below 30%. But this misses two important points. First, it is not just exporters who face competition from the UK. Proximity, a shared language and, in recent years, deregulation driven by the Single Market have made Ireland a natural target for UK firms in all sectors, including some traditionally thought of as non-traded. Second, the firms responsible for the growth in Ireland’s exports to continental Europe, many of them in high-technology sectors such as chemicals and computers, are disproportionately foreign-owned, high-margin and capital-intensive. This makes them much less vulnerable to exchange-rate fluctuations than Irish-owned firms. For both these reasons the exposure of Irish GNP and employment levels to sterling is greater than the UK share of exports would suggest. There is a real danger that a sterling depreciation relative to the euro could cause irreversible damage to the indigenous sector and knock stripes off the Celtic Tiger.
Finally, lower interest rates can mean permanently low real interest rates. But who wants them? Not the Central Bank of Ireland for one. In recent months it has warned that the boom may lead to a revival of inflation, necessitating an increase in interest rates. The irony of the current situation is that the strength of sterling is part of the problem since it risks contributing to overheating in domestic markets. The Irish pound has already followed sterling up as far as it can go without leaving the permitted ERM range. The current Irish policy dilemma reflects the kinds of problems which would be exacerbated in EMU by the need to tailor a single monetary policy for a group of countries with very different macroeconomic problems. Of course, in Ireland as elsewhere, a common response to the economic case against EMU is that the project is primarily a political one. To this, it is tempting to reply with Bill Clinton’s slogan “It’s the economy, stupid!”"
(Independent on Sunday 15 June 1997: http://www.economics.ox.ac.uk/members/peter.neary/writi...7.pdf )
12. Well known economist David McWilliams writing in 2001:
"In the week the Nice Treaty spin machine cranked up a gear, our Central Bank governor explained that although our interest rates are far too low, our commitment to EMU (the reason interest rates are too low) is totally rational. His comments were made before Thursday's reduction in interest rates that drove the cost of borrowing to an even lower and, presumably in the governor's mind, even more inappropriate level. Perplexed already? That's only the start.
Looking back at the quotation [by the Governor], we see he contends that EMU will give us security. Presumably he means economic security. This is a bizarre thing to say. If he means that our wealth will be protected by the single currency, there appears to be little evidence of this. If a single currency alone protected and fostered wealth creation, then there would be no poor mezzogiorno in Italy, no north/south divide in Britain, and Andalusia would not be considerably poorer than the Basque country. There are clearly other forces at work.
Over the past 15 years, Ireland's economic cycle has become increasingly correlated with the Anglo-American business cycle, rather than that of continental Europe. Given the dominance of the Anglo-American world in our trade, investment and demographic flows, it seems hard to sustain the governor's view about security.
A second problem is not just that we have dominant links with the Anglo-American world, but also that our economy works like theirs, rather than the continentals'. Take the effect of interest rates. The impact of a cut in interest rates typically relies on how much debt there is out there, whether it is at fixed or variable rates and whether those rates are short or long term. Strong home ownership and house price inflation further amplify the impact of interest rate movements.
In continental Europe, people borrow at long-term fixed rates, house prices generally do not move rapidly in response to falls in interest rates, largely because home ownership is not nearly as widespread and the idea of paying out 40 per cent of your post-tax income on a mortgage is laughable. Therefore, short-term interest rate changes which are heralded as `good news for homeowners' in Ireland hardly register on the continent, where they take a long time to work into the economy, and any delayed impetus usually comes from the corporate sector.
It is easy to see why a fall in interest rates has a magnified effect in Anglo-American economies, and when rates are rising there is a significant depressing effect. Europe does not work like this. Given this dichotomy, it is hard to uphold the governor's (and the rest of the political elite's) second assertion that EMU will add to stability. This is nonsense.
First he seems to accept that on interest rates, Europe offers the wrong policy for Ireland at the moment. Either he believes that the `wrong' policies bring stability which by definition makes them `right', or he is happy to punt long and suggest that although it is not apparent to us mortals now, in the long run he knows what he is doing. (More evidence of religious hocus-pocus over substance?) Unfortunately for us, the numbers suggest that EMU will lead to more instability, not less. As long as our economic cycle is wedded to that of the US, EMU will mean that our interest rates will be low when they should be high and high when they should be low.
It is more accurate to forecast that EMU will make Ireland susceptible to bouts of inflation followed by deflation, rather than a sustained period of price stability.
In direct contrast to the governor's assessment, it is much more likely that over time our membership of EMU will lead to less stability, security and more variations in inflation..... However, let's not try to spin flannel to the population about the merits of our present policy when a good Leaving Cert economics student could blow the government's arguments out of the water."
(Sunday Business Post 20 May 2001: http://archives.tcm.ie/businesspost/2001/05/20/story432...8.asp )
13. "Economist David McWilliams has suggested that Ireland should leave the Euro and then devalue its currency. He argues that no small country like Ireland has ever solved its problems without currency devaluation. It is incontestable that many Irish firms have been priced out of the UK market by the appreciation of the Euro against Sterling, which has suffered a massive devaluation as the Bank of England reduced interest rates. Similarly the Euro has risen in value against the Dollar."
( http://johnbarrysblog.blogspot.com/2009/01/should-irela....html )
14. This is a good discussion on the importance of capital control, and an early warning of the upcoming financial crisis: http://www.debtireland.org/resources/ddci-re-Ann-Pettif...y.htm , and see also: http://www.iht.com/articles/1992/09/21/ebon_1.php?page=1 .
15. Washington Post 7 Dec 2008: http://www.washingtonpost.com/wp-dyn/content/article/20...onomy .
16. "...the island nation's fishing industry is booming, with big catches and rising export prices thanks to the collapse of Iceland's currency, the krona......For now [meaning the industry would be ruined if they joined the EU], fishermen are the poster boys of Iceland's long slog to economic revival. Sigurgeirsson, 34, has been at sea for 10 years and is bemused by his industry's new image. He says fishermen are being painted as a cross between national saviors and fatcats who haul in big salaries from bumper catches.
"On the news they are talking about us now. They say we are making money for the nation," said Sigurgeirsson, sitting amid coiled ropes and weathered waterproofs below decks of the trawler Faxi. "We have been doing that (all along)."
(San Francisco Examiner 16 December 2008 http://www.examiner.com/a-1747184~Crisis_hit_Iceland_se....html .)
17. http://www.telegraph.co.uk/finance/comment/ambroseevans....html .
18. Taking 6,144.06 as the Icelandic figure for the start of the year and 352.16 at its end, and the Iseq Financial index at 10,879.14 falling to 935.48. Bear in mind that I am comparing the broad Icelandic index with only the financial Irish index, the reason being that clearly the small Icelandic exchange was affected by the banking crisis, rather than because of any other economic issue, which therefore might be more analogous to our financial index than the broader Iseq.
19. http://www.bonds.is/assets/files/glitnir301.htm .
20. http://www.irishtimes.com/newspaper/opinion/2009/0120/1....html .
21. http://newsfrettir.com/?s=budget .Taking 1 Icelandic Krona as giving you 0.00599442 euro (as of 21 Jan 2009), and the population of Iceland as 320,000 gives you 2,885 euro per person.
22. http://www.forbes.com/afxnewslimited/feeds/afx/2009/01/....html and http://www.independent.ie/national-news/budget-deficit-....html . This figure is just 20 billion divided by 4.5 million. In both the Irish and Icelandic figures I am only referring to the budget deficit, before adding in any new costs associated with bailing out banks, which are in flux and unclear in both countries.
23. This is the directive that the Dail just transposed into Irish law: http://acts2.oireachtas.ie/zza24y1995.18.html .
24. Avril Doyle MEP speaking in the Seanad pointed out that this would be against EU rules. She also referred to he opposition Irish economists had to joining the euro:
"Given that the Bill provides for the ceding of control of monetary policy to the governing council of the European Central Bank, we will no longer be able to adjust exchange rates or interest rates to correct domestic problems or economic shocks. .... greater brains than anything gathered in this House or these institutions, both in the European and international scene, are warning of the risks of economic and monetary union for countries like Ireland.
The debate on the lack of economic convergence is interesting. For example, will Ireland, with its economy in overdrive and its experience of high growth rates and given the state of economic cycles, especially in France and Germany, be suited to the type of monetary policy that Europe will demand when we are part of EMU? Economists have serious concerns about these aspects.
The British Treasury decided it was not ready to consider economic and monetary union at this stage because of the lack of economic convergence. The argument applicable to Britain applies equally to us. Many eminent economists — for example, Chris Johns of Allied Irish Capital Management Limited — support this approach. The British Treasury measures the difference between the actual and potential output of the economy to compare economic cycle vis-a -vis general economic convergence. While this measure is not directly applicable here, Terry Baker of the ESRI has commented on this to the effect that the divergence in economic cycles between Ireland and Germany or France is clear from both growth rates and interest rates, whatever measurement is used. According to the latest EU figures, our economy will grow by between 7 and 10 per cent this year while Germany's will grow by approximately 2.5 per cent and France's by 2 to 2.3 per cent. Our short-term interest rates are approximately 6 per cent compared to 3 per cent in Germany. According to Chris Johns, economic and monetary union will mean monetary polices that suit Germany and France but will not be appropriate for us. It will mean we will have to operate with interest rates levels which are too low, which raises questions about the potential overheating of the economy.
An analysis and forecast must be carried out on the impact of sterling when Ireland is a member of EMU and Britain is outside..... We need to know more about the Minister's thinking in this area because a sterling related economic shock of any type would impact enormously on Ireland after monetary union.
The availability of credit at relatively low interest rates has been a major contributory factor to the increase in house prices, which are at historically high levels with reference to average earnings. House prices have risen by 50 per cent since 1994 and there are predictions of further substantial price rises for which evidence already exists. Home ownership is important to Irish people compared to continental Europe, where most people never aspire to owning their home and where rental of private property is the norm. This could become an issue in Ireland and there have been calls for the Central Bank to restrict credit, presumably on the understanding that this will somehow control prices. The Governor of the Central Bank has pointed out that the bank has no authority to restrict credit. In any case, such restriction would be inconsistent with the European Union. It should be made clear that given our ceding of control of monetary policy to the European Central Bank, there will be no question of our Central Bank intervening to restrict credit."
(Seanad 12 March 1998: http://historical-debates.oireachtas.ie/S/0154/S.0154.199803120006.html ).