Irish Mail on Sunday (printed)
by Hermann Kelly
THERE IS ONE SIMPLE STEP THAT WOULD LIFT US OUT OF RECESSION: SO WHY IS EVERYONE TOO SCARED EVEN TO SUGGEST IT?
On the good ship Ireland, we are heading, in economic terms, into very stormy waters. All the dials on the bridge are signalling danger. There are alarms going off in every section and a warning is being bellowed over the intercom: ‘Recession, Recession!’. What can we do to steer us out of this growing storm?
There is one obvious solution which would allow us to lower interest rates, boost our exports and help our industry, but it is one which the commentariat are terrified of even raising. That option is the withdrawal form the euro. And yes, this option may be difficult but it is not impossible – and it has major benefits.
As it is, high eurozone interest rates are hurting homeowners by pushing up mortgages and increasing inflation. The latest interest rate rise alone puts in additional monthly burden of about €40 on a typical €250,000 mortgage over 30 years. Since the interest rates began rising from 2pc, a hefty €360 every month has been lumbered on the average homeowners shoulders.
Other things are going up as well. An additional 19,000 people found themselves unemployed between May and June, bringing the total signing on to 217,400; this is an increase of 55,000 in the past 12 months alone. It may not be armageddon, Mr. Cowen, but it is a terrifying meltdown.
So what, in the face of all this does the European Central Bank do? As always, it focused on the French and German economies and put up euro interest rates a quarter point to 4.25pc, the highest level in seven years. Just when we need a rate cut, the ECB is yanking them up. An absolute disaster.
[…] Even Paul Tansey, economics editor of the resolutely pos-EU Irish Times, admits: ‘A further tightening of monetary policy is wholly inappropriate to current Irish economic conditions.’
But if it is so inappropriate, what are we going to do about it? How about we follow up on this knowledge to the next logical step to find a practical solution. Although it will make the resident Euro-Federalists of the Irish Times faint, one clear option that we have is to withdraw from the euro, devalue our currency and set our own interest rates to suit ourselves. There has never been a better time to do it. In this post Lisbon stasis, a new opportunity presents itself.
It is no coincidence that in 1993, the year Ireland devalued its currency by 10pc, our economic growth rate, after a long period of stagnation, increased remarkably. During this period, a regime of lower personal and corporation taxation introduced by the government also encouraged inward investment by US multinationals and a sharp increase in exports. The Celtic Tiger economy was thus born.
But Ireland’s membership of the euro changed things dramatically for the worse. The first consequence was the handing over control of interest rates to the European Central Bank in Frankfurt, which has a mandate to keep inflation around the 2pc mark and takes much greater cognisance of the larger states.
As a result of low euro interest rates, Ireland sloshed around in a sea of cheap credit which led to a building boom beyond compare. Cheap money led to an unsustainable boom. But just as we needed higher interest rates to calm the economy down to a sustainable level, the ECB cut rates to help the continental countries.
Bust now follows boom. Cheap money led to an asset bubble showing that, in monetary terms, one size does not fit all.
The rise in ECB rates has led to the steep appreciation of the euro against the pound and dollar. Given that we do almost two thirds of our trade with these countries, the euro has made our exports to our main markets uncompetitively expensive.
A gadget costing €1, made here in January 2002, would have cost an American consumer of business $0.88; today, incredibly, that same €1 gizmo would cost an American $1.56. Is it any wonder that exports are nosediving?
Most people, quite rightly, want free trade and good relations with their neighbouring European countries. But that doesn’t demand euro membership – Britain and Denmark are members of the EU with full access to open markets yet have retained their own currencies.
Of course there may be other ways to tackle this problem. Ray Kinsella, professor of banking and financial services at UCD, is adamant that one size does not fit all and suggests two solutions.
One is that the ECB’s mandate be changed to allow its members greater discretion in taking economic growth and unemployment into account instead of just keeping inflation below 2pc. In a nutshell, the ECB should move closer to the mandate of the US Federal Reserve. A second option, Kinsella suggests, is the setting up of a pan-euro compensating mechanism to allow fiscal transfers when countries like Ireland receive shocks, thus helping to mitigate the effect of a centralised policy regime.
However, I believe it is now opportune for us, after planning and preparation, to take more decisive action and take back our own national currency in order to fight the recession. We need more control of our economy.
This move would entail a declaration and agreement with other EU states that Ireland intends to leave the eurozone on a certain date. Our withdrawal would not mean either our abandonment of or expulsion from the EU. Today, only 15 out of 27 EU states are in the eurozone. Sweden signed up to the euro with the Maastricht Treaty in 1993 but still hasn’t introduced it. It hasn’t been penalised.
And what could the rest of the EU do anyway if we quit the euro – invade Ireland? Withdrawal from the euro would entail preparation and a time of transition to make contractual changes. It is difficult but possible. […] but it would not mean EU grants would stop or the common market would be shut to Irish goods. There has been a lot of talk, post-Lisbon referendum, about a two tier-EU. But there is already a multi-tier EU as it is. Some countries in the EU are not in the euro; some members are not in the Schengen area, which allows for free international movement without passports. I would be very happy to be on tier two – but with lower interest rates and an economy that actually works.
Put simply, euro interest rates have damaged our competitiveness at a time of growing global competition. If we introduce our own currency, we can devalue our currency to make our exports attractive again.
If we gradually move out of the euro, we also bypass the eurozone’s Growth and Stability Pact, meaning the Government will no longer be restrained by unnecessarily tight limits on borrowing.
Huge powers were forfeited the day we signed up for the euro, a decision exerted not by economic logic but by political pressure. The czars of European integration saw the euro as a stepping stone to political union.
It is now time for Ireland to reweigh the costs and benefits of the euro. Yes, it is handy when traveling and increases price transparency. However, it has many more downsides.
Yes, Government policy and the global credit crunch have had an effect on leading us to this point, but we need to have a national debate about the detrimental effect of the euro on our economy – and how we’re going to get out of this recession.