Belfast Telegraph

When the euro came in, fiscal options went out

By Brendan Keenan

I have been amusing myself over the supposedly news-light silly season of August, by looking back at the start of the four decades since 1970 — with the tremendous benefit of hindsight.

Looking back has been an interesting experience, for me anyway. One can only hope that it had a similar attraction for the readers. It brought to mind the point made by evolutionary science — that if you wound back the tape of time, you would not get the same result. Human beings, for instance, might not come into existence.

It is even more obvious that the tape of ordinary history would never play the same way if run again. Each moment, individual events and decisions change the future for ever.

The first great economic ‘what if' from those four decades is 'what if Fine Gael and Labour had won the 1977 election?' They were the hot favourites in the media, even though they had embarked on the most severe fiscal correction in modern Irish history — until the present one, that is.

Opinion polling was less sophisticated then, and most commentators, due to lack of previous evidence, seem not to have realised how difficult it is for a government to correct the public finances and get re-elected, especially when the opposition is promising sunshine and roses.

It certainly looks as though that will be this government's fate, and it could also be the fate of the next.

However, the unsettling fact remains that had the coalition won in 1977 and fiscal correction continued — rather than Fianna Fail's grand stimulus experiment — the course of Irish economic history would have been quite different.

The early 1980s would have been more like the early 1990s, when a newly fiscally prudent Fianna Fail steered the economy through the nasty Gulf War recession. Unlike other occasions — including the present one — Ireland was then able to participate fully in the global recovery when it came.

The really big ‘what if', though, is the creation of the euro in 1999. Had that not happened, everything would be different. It is worth remembering that it never seemed very likely that it would happen.

Civil servants and policy wonks may have loved the idea, but there was nothing much in it for elected politicians. It took the political consequences of the totally unexpected unification of Germany to make the euro a reality.

But this alternative history is not discussed much, probably because it is too close to a discussion about leaving the euro — an entirely different matter. How things would have been if the single currency had never existed is purely academic — silly season stuff.

A bit surprising, therefore, to find it turning up in the new analysis of the euro from the National Economic and Social Council (NESC).

In theory, still having the Irish pound would have allowed the Central Bank curb the excesses of the credit bubble. In practice, it could probably have done no such thing. This is leaving aside the question as to whether it would have had the guts to use its independence to cut off Bertie Ahern's incredible money-making machine.

The record suggests strongly that, under its recent management, intestinal fortitude would have been lacking. But, as NESC points out, the difficulties would be more profound than that. To take one example, higher interest rates might well have pushed up the value of the Irish pound, adding even further to real incomes, and increasing inflows of foreign capital.

My trip down memory lane turned up the pre-euro Central Bank pointing out such dilemmas. It can target a stable exchange rate, or it can set interest rates to stabilise the economic cycle. It cannot do both, or even mix and match to any great extent.

Membership of the euro means neither can now be targeted. Both the real exchange rate and the interest rate can be at inappropriate levels. Most of the time, they will be.

We know about the political cronyism and irresponsible leadership which contributed to the great failure to manage euro membership. NESC highlights another one, which would be there even under honest and forthright political leadership.

This is the surprising lack of consensus on how the country should be organised and what its social and distributive structures should be. NESC, which represents the Government and social partners, was supposed to construct such consensus but created only the illusion.

If there is no consensus, then there should be competing versions of society to choose from. But there are only endless arguments, which is not the same thing.

There is indeed more to politics than maximising economic growth. At present, there seems to be something amiss with both.

Belfast Telegraph