As my native Ireland teeters on the edge of bankruptcy and bailout, sections of the British press have taken the opportunity to view Ireland’s difficulty as the Europsceptic’s opportunity.
Some of the comment has centred around the idea that British taxpayers will be asked to ‘bail out’ their feckless neighbours, as, apparently they were with Greece last year.
This article aims not to explore that argument further, as it is a debate too reliant on uncertain future events, and is framed within a Britsih nationalist context which it is not appropriate for me to explore.
Instead I want to focus on another aspect of the Eurosceptic press’ comment, typified by the Daily Mail, which takes the view that the Euro currency has led Ireland to this point of malaise, and that Britain should take Ireland’s troubles as a cue to rule out entering the single currency. Advocates of this view draw their battle lines along old fashioned parameters, with gallant Ireland, like gallant Belgium in 1914, trying to hold out against a great malignant European force.
The central economic argument made by these commentators is that by joining the Euro, Ireland forfeited control of its own interest rates and monetary policy, the bubble conditions created by the ‘Celtic Tiger’ era could not be reversed or tamed by restricting demand in the economy through interest rate rises, and neither could demand be reignited by a programme of quantatitive easing as the Tiger began to lose its claws.
Not only does this argument show a lack of understanding of the particular conditions and circumstances which created the boom in Ireland, it shows a basic lack of understanding of economics.
As a country, the Republic of Ireland attracted international investment through pursuing a policy of low corporation tax. This delivered many benefits, but it did not address Ireland’s profound infrastructure deficit, with a lack of roads, of industrail/retail units, and of housing stock combining to mean that the country’s capacity to grow in an organic way was severely restricted.
The low interested rates policy allowed for the domestic Irish economy to grow in conjunction with the growth achieved by the arrival of multinationals, allowing domestic demand to increase and domestic consumption to rise benefits indigenious Irish businesses.
Being part of the Common Market helped to deliver the access to markets which a small nation like Ireland needed; being part of the Euro delivered access to the credit which allowed the domestic market to expand.
The whole economic model was constructed on the basis of low interest rates. Any abandonment of that policy would have created a supply side bubble much earlier in the economic cycle and at a point when much less of the infrastructure gap deficit would have been addressed.
That Ireland collapsed anyway was because the government took the easy options in relation to domestic expansion, allowing a bubble to develop in the housing market. Interest rate rises, would have alleviated this bubble, but would also have stunted the much needed expansion of the rest of the domestic economy. That the housing bubble sucked in all available demand anyway is indicative of other areas of government macroeconomic policy failing to deal with it.
If the great crash of 2008 was evidence of the fallacies contained in the neo-liberal economic model, the fallacies within the classical economic solutions proposed by those such as the writer in the Daily Mail article above, were outlined by JM Keynes many decades ago.
If Ireland were to abandon the Euro now and restore its own currency, the Irish punt, would floating freely be hammered in the money markets, making the yield required on bonds more expensive and imports dearer, taking demand out of the economy on the supply, as well as the demand side, causing an even worse crisis, being part of a large currency and wider trading area means that those dangers are less than they would otherwise be.
There are many merits and demerits to Britain joining the single currency in future, but Liberals should not allow the debate to be tainted by the situation in Ireland.