It has been obvious for many months now that the Irish economy was in deep, deep trouble and no one really believed that the Irish government could possibly manage to get the country out of the mess without the sort of help that Greece was forced to accept earlier this year.

So it is that today the Irish government have officially applied for loans from the European Union and the International Monetary fund. There is deep anger among the Irish public with several saying that “this is the end of Ireland as a sovereign nation. We didn’t last 100 years.”

For the record the Irish Free State was established on 6th December 1922. However even before the Irish freed themselves from “the Brits” a Civil War broke out which lasted from June 1922 until April 1923. During this period many Irish died at the hands of their own countrymen as different factions fought for control of the country. It was not until 29th December 1937 that a new Constitution was introduced, which described Ireland as “a sovereign, independent, democratic state,” named Eire.

In addition to help from the EU and IMF, the United Kingdom, although not one of the “Eurozone” countries (the 16 EU states which use the Euro as their currency) has offered direct aid in the form of loans to Ireland.

What Went Wrong With the Irish Economy?

Just a few years ago Ireland seemed to be on top of the world. It had a booming economy. Huge grants from the EU fuelled a massive programme of regeneration and everyone was saying that “the Celtic Tiger” (the Irish economy) was in the ascendancy. Irish banks were opening up branches all over the world and this small nation on the edge of Europe seemed to be invincible.

Only 2 years ago Alex Salmond, the Scottish National Party’s First Minister in the devolved Scottish Parliament, was arguing that Scotland didn’t need the rest of the UK “Scotland” he said, “can stand alone in the world economy and be as successful as Ireland and Iceland”. He doesn’t seem to be saying that anymore and neither does he seem to realise that both the Royal Bank of Scotland and the Bank of Scotland would have gone bust without the intervention of the Westminster Government and English taxpayer’s money. In fact without that aid the only Scottish bank still standing would be the Australian-owned Clydesdale Bank.

But back to the problems of Ireland. Central to the current crisis in which the Irish find themselves was the decision they took to give up their own currency – the Punt, which was pegged to Sterling – and become one of the Eurozone countries. It always struck me as strange that a country that fought long and hard to free itself from what it saw (with a lot of justification) as the “British yoke” was so keen to join the Euro and effectively give up their own sovereignty by giving the European Central Bank (ECB) complete control of Irish monetary policy.

This was sheer madness. Even Gordon Brown, possibly the most fiscally stupid Chancellor Britain has ever had, had enough sense to keep Britain out of the Euro, and indeed he fought his own Prime Minister, Tony Blair, and many of the cabinet over the issue. Some people say I have never had a good word to say about Gordon Brown. They are wrong. He got it right just once – he kept Britain out of the Euro otherwise our own economy would currently be in a worse state that that of the Irish.

What is the Problem With Having a Single Currency?

Having a single currency means that you also have a single monetary policy, central to which are the issues of interest rates and inflation. Prior to joining the Euro every country had control of its own interest rates and took decisions which they believed were in the best interest of that country alone. Once they joined the Euro they lost control of their monetary policy which became the responsibility of the European Central Bank.

What is Monetary Policy?

The term “monetary policy” refers to actions taken by governments or their agents (such as the Bank of England or the European Central Bank) to influence the level of economic activity by manipulating interest rates so as to influence the supply and price of money. In so doing, they aim to influence the levels of consumer spending and investment and to influence demand so as to maintain target levels of inflation.

This is a sensible process but even for a single country, such as the UK, it isn’t easy to balance the needs of different parts of the country. What is suitable for London and the South East may not be the same as for Liverpool or the North East. In Ireland Connemara may have different problems than Galway.

Imagine then how difficult it must be to design and manage a single monetary policy that would work satisfactorily in the South West of Ireland as well as in Cyprus, nearly 4,000 km to the East. Or a policy that suited the Canary Islands as well as frozen Finland some 6,000 km north of those sun blessed isles. 329 Million people in 16 member states over hundreds of thousands of square kilometres.

Frankly it is impossible unless the economies of all those countries which join a single currency are broadly comparable and when they join are at the same point in the economic cycle. It won’t work if some countries are in recession whilst others enjoying growth.

This was recognised by the EU and the ECB and so any country which wanted to join the euro had to demonstrate a range of “convergence criteria” designed to ensure that they were financially stable enough to cope with the shock of entering the euro. This included demonstrating that government spending was under control, that borrowing was a manageable proportion of GDP (Gross Domestic Product) and so on.

It was the fact that the UK was not at the same stage in the economic cycle to most of the rest of Europe that kept the UK out. Gordon Brown (in a unique moment of wisdom) argued that the UK was experiencing a period of relative growth whereas the rest of Europe was suffering from varying degrees of economic slowdown. If the UK had joined at this time and the euro-wide interest rate had been set at a low level to reflect the average position of the rest of Europe, then the UK would have experienced strong inflationary pressures as a result of a growing economy and a low interest rate.

When the euro was set up in 1999 there were only six economies – Germany, France, Austria, Netherlands, Luxembourg and Belgium which actually met the convergence criteria, and in fact Belgium was a border-line case that only just about met all the criteria.

Another five countries (Finland, Ireland, Italy, Portugal & Spain) were also admitted to the Eurozone in 1999 on the basis of flawed or downright fraudulent figures. This was done for political rather than economic reasons. There was no way that those countries were going to avoid serious problems at some point. This can be seen now as, with the sole exception of Finland, all those countries are struggling to avoid the fate of Greece and as we can see Ireland has failed to do so.

Since 1999 a further 5 countries have joined the Eurozone. It was frankly a complete disgrace when Greece was allowed to join in 2001 when everyone knew that the figures supplied to support their application were complete fiction. Indeed in the past few weeks we have seen that the figures they supplied when applying for massive loans to bail out their economy were also total fiction.

The other 4 Eurozone members, Cyprus, Malta, Slovakia and Slovenia are frankly too small to be of major concern. But that said Malta and Cyprus as very small island nations do balance their budgets fairly well and probably do meet the convergence criteria. Slovakia and Slovenia are a bit of a concern but they seem to be managing fairly well by keeping their heads down and saying nothing much.

So Why Did the EU Monetary Policy Fail Ireland?

Membership of the Euro is not the only factor to contribute to the mess in which the Irish nation now finds itself. Not least among other factors are the proven ineptitudes of successive Irish governments, the Irish Civil Service, and the Irish banking and financial regulators.

It is probably true to say that Irish politics are pretty “third world”. Some Irish friends of mine call their government “a complete farce”. In addition compared to the self-serving activities of most Irish politicians the furore over UK MPs expenses is a storm about nothing, never mind a teacup or far less a duck house. With a few exceptions Irish Politicians and Civil Servants have a long recognised propensity to serve themselves first and the public second; or even third – after their families and friends.

By the way, the political party currently in government in Ireland – and which was the “political” parent of the Irish Republican Army (IRA) during the Civil War – has also presided over every major crisis since the Free State was founded. The name of this party is pronounced Fianna Foil but is spelt Fianna Fail! Hmmm. Not only that but the “Fianna” in Irish history were mercenary bandit warriors who roamed Ireland “robbing from the poor and keeping for themselves”. Sort of Robin Hoods in reverse.

However at the heart of the problem is the decision taken by the Irish to abandon their own currency, and its historic ties to the British Pound Sterling, and join the Euro. I’d like to think they took the decision on (erroneous) economic grounds but I do wonder if it wasn’t really an anti-British decision.

I do like the Irish and they were not well served by many of the English rulers and landlords. I am a Scot, more than that I come from the Scottish Highlands and we too were badly dealt with. The Highland Clearances were an atrocity which were it to be repeated today would be called ethnic cleansing. We remember it but we don’t go on about it ad nauseum. Neither do we go on about the Potato Famine. This was not something that only happened in Ireland and it wasn’t the English who caused it. In the early 1840’s potato blight ravished most of northern Europe and whilst the effects in Ireland were not helped by other social and economic factors the same was true of the Scottish highlands and islands, where more died or were forced from the land than ever were in Ireland.

However that is history and should be put behind us. But I am afraid that in Ireland, and to a slightly lesser extent, in Scotland, history too often clouds our modern judgement. Heart over head when really head should rule over heart.

Ireland’s current problem can be said to stem from the fact that the dominant economic power in the Eurozone (and indeed in the EU) is Germany. Germany bankrolls the Eurozone and, with the UK, it bankrolls the EU as both Germany and the UK pay far more money into the EU coffers than they get back. By contrast the Irish have always taken out far more than they put in. This explains why for so many years they have been so enthusiastic about their EU membership. The Irish attitude to the EU only changed when it was proposed that more countries should be allowed to join the EU and they realised this would mean less EU cash for Ireland.

Since the establishment of the Euro in 1999 the German and the Irish economies have been about as far from convergence with each other as you could get. When Germany was in recession Ireland, fuelled by EU (German & British) money was booming, and vice versa. When the Germans needed a lower interest rate the Irish needed a higher rate, and vice versa. The compromise rates that have been in place over the last 11 years have never satisfactorily served either the Irish or the German economic needs.

So it was that from about 2005 the Irish economy was awash with cheap money and the Irish government was spending EU grant cash – some might call them “bribes” to get the “right” result in Irish referenda – like there was no tomorrow (though why they built 1,000 km of motorways with no service stations on them is an interesting question).

The availability of cheap mortgages led to massive house price inflation and to an unsustainable expansion of house building. People over-extended themselves often “releasing capital” in their homes to invest in other properties. When the market collapsed they couldn’t pay the loans back, and the banks started to wobble. House prices in Ireland have collapsed; the country is covered in estates of half finished houses that will probably end up being demolished. No one wants them and no one could afford them anyway.

So Why Should Ireland Embrace Sterling?

Ireland was for many centuries part of the United Kingdom and despite the antipathy between the Irish and the English (the Welsh and Scots are not disliked quite so much). The fact is that the two countries have much more in common than they might like to admit and Ireland certainly has much more in common with the UK than it does with Germany, economically and in many other ways. For example:

  1. Along with Cyprus and Malta, the Irish have a legal system based on English “common law” rather than the “civil law” system of the other EU member states.
  2. The Irish, like the rest of the British nations, have a much higher level of home ownership than the continental Europeans, particularly the Germans, where rental of a home is the norm. This means that interest rate levels have a much more immediate effect on the economy and so inappropriate interest rates such as Ireland has been forced to swallow cause much more damage than would otherwise be the case.
  3. The Irish and UK economies depend much more heavily on investment by insurance and pension providers than is the case elsewhere which can mean that these countries need to take more account of such factors than the rest of the EU.
  4. Irish banks have a massive presence in the UK and the Bank of Ireland issues its own Sterling banknotes from its Northern Irish branches. Not only that but the Bank of Ireland runs the banking operation of the UK Post Office including provision of loans and credit cards to millions of UK residents.
  5. British banks also have a huge investment in the Irish economy as do many UK and “offshore” financial businesses. For instance Ireland is a major centre of investment fund management and insurance business.
  6. Irish Citizens have the right of free movement and residence in the UK and can vote or stand as a candidate in all UK elections. This arrangement has nothing to do with EU membership, which it predates, and UK citizens don’t have the same rights in Ireland.

It is generally thought that once a country has joined the Euro it cannot leave and indeed there is no mechanism for this to happen. The suggestion is that the only way to exit the Euro is to leave the EU altogether.

Apart from this there is no doubt that a country such as Greece would find it very difficult to leave the Euro and return to a free floating national currency which would instantly plunge. Setting a fixed rate would not help as getting the level wrong could be even worse than floating and watching the new currency freefall.

If Ireland were to consider leaving the Euro it would face exactly the same problem as Greece. However, given the strong established trading and other relationships that exists between the UK and Ireland, the similarities in our economic and legal structures, and the fact that though “divorced” we have by and large stayed on speaking terms, perhaps the answer is that the Irish should step out of the Euro and into Sterling. They could if they preffered issue the notes as Punts but peg the value of the Punt to Sterling so they would get protection against a huge devaluation. In terms of convergence the Irish and UK economies are much closer than the Irish and any other EU nation and whilst there may be a short-term Sterling wobble I believe that the Punt would get protection from Sterling and in a fairly short time the combination of the two economies under one currency would benefit both countries.

Worth thinking about? I hope so, but I doubt that there will be much support for this idea from Irish politicians. Even the Irish public, who normally have no love for their political masters and currently have even less, might not be keen. But who knows? Can Ireland overcome its hang-ups over history?

I applaud the courage of George Osborne and the UK coalition government who are likely to be castigated by the more xenophobic and anti-Irish amongst us. But I hope the Irish people will see this offer of help for what it is. Not the action of a past “imperial ruler” but a true act of friendship for our near neighbours and estranged family.

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Category: International Taxation

15 Responses to “The Irish Should Dump the Euro and Embrace Sterling”

  1. James Green says:

    Well Jimi, I’m afraid I can’t agree with your delusion as to the state of the Irish economy. Certainly it is growing fast but then that is only from the very low base it touched five years ago. Still not back to where it was.

  2. Jimi says:

    What a load of crap!
    Ireland is the strongest recovery state in the EU following the european recession!
    At one stage Irelands economy was so strong that EC leaders believed they would melt the EU currency!

  3. James Green says:

    Hi Ed, well that’s exactly what all paper money is.The technical term is “fiat money” but you might as well call it monopoly money.

  4. Ed says:

    Why Not print our own Monopoly Money, ” The Funt ” and pretent it’s real money, just like the US Dollar and the English Pound?

  5. Sid says:

    Keep up the great work mate. This weblog shows you know your subjects very well.

  6. Declan O'Hare says:

    Damn good idea! Certainly makes sense.

  7. Pandora says:

    Thank you very much for this provocative article.

  8. Thanks for this great resource. This is a particularly good article. Do you really think that the Irish could leave the Euro in the way you say?

  9. James Green says:

    No, I’ve not got into Facebook (yet?)’

  10. FGG says:

    Do you people have a facebook fan page? I looked for one on twitter but could not discover one, I would really like to become a fan!

  11. James Green says:

    Thanks for your comments Paddy. Can I just point out that I am not English but Scottish? Next time I am in Frankfurt I’ll look forward to a pint of Guinness and a spot of Paddy to wash it down!

  12. Paddy O'Brien says:

    Thank you James for a well argued case. As you can probably deduce from my name I am Irish (from Cork) and though I have an underlying feeling against the English this isn’t really anything that particularly affects my relationship with my many English friends. It is probably just a feeling that we Irish are better than you English.

    You are so right to say that Ireland and England have more in common than any other EU country. As it happens I live and work in Germany and have done for a few years now. I fully agree with you that the economies of Ireland and Germany have been far apart since the launch of the Euro. We should not have gone in and we should come out and throw out lot in with the British economy.

    You are too kind in your comments about Irish Politicians and “civil servants”. Were you worried about the libel laws? I can assure you and your readers that the level of corruption in the Irish political system is stunning. Iraq under Saddam was more open and honest! Graft, corruption, politicians involved in prostitution and gun running. God help us, Gerry Adams is actually more principled that most of our political masters.

    More power to your elbow. Tell it as it is and even if you are English I’ll buy you a pint next time you are in Frankfurt.

  13. James Green says:

    Thank you for your comment Declan. Karl, the call for Ireland to increase the rate of company tax is a complete nonsense. The fact is that countries such as France and Germany know that it is the low rate of tax in Ireland that has attracted businesses – such as Microsoft – to that country as well as many financial service companies involved in insurance and fund management among other activities. The French and the Germans would prefer these businesses to locate in their country and are taking this chance to make a fuss about low corporate tax rates in Ireland (though Ireland has not the lowest tax rate in the EU).

    The fact is that if the Irish government were to increase corporate tax then rather than this increasing the tax take for the Irish treasury the opposite would be true as international businesses would move to places like Bulgaria (10% tax) or Switzerland (as little at 7.5% in some places).

    Have a look at the post below which explains why it is that the best way to increase tax income is to reduce the rate of tax.


  14. Karl says:

    What do you think about the call for Ireland to increase the rate of company tax above the present 12.5%?

  15. Declan says:

    Absolutely brilliant article. I do hope this gets the wider readership it deserves.

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