Leaving euro would only make problems worse, says Trinity economist
LEAVING the euro would cause severe disruption to the Irish economy and would not help solve the fiscal crisis, a leading economist said yesterday.
Dr Philip Lane of Trinity College Dublin said the economic problems would only be exacerbated if Ireland left the single currency.
"The disruption caused if we left the euro would be enormous. The Government would have to implement severe controls on our currency, which is unthinkable given how globalised our economy is. As well as this, high interest rates would inevitably follow, which would cause huge problems, so it would not be helpful at all," he said.
Dr Lane described the stability and growth pact, which demands that a eurozone country's deficit not exceed more than 3pc of GDP, as "irrelevant", and added that the political difficulties for any government trying to resist calls to spend a budget surplus had to be recognised.
"The pact fell down because it assumes strong government policies during the good times, but if the last government had been running a surplus of 8pc of GDP, the political pressure to cut taxes or increase spending would have been intense," he added.
Dr Lane was speaking at an Economic and Social Research Institute (ESRI) seminar on globalisation, held in conjunction with Trinity College Dublin.
His views were echoed by the Central Bank Governor Dr Patrick Honohan, who said that joining the euro should not be looked at as a primary cause of the credit bubble.
"We were at our most competitive in 1999 immediately before we joined the euro so it is easy to say that joining the single currency allowed things to get out of control but that is not necessarily the case," he said.
"Latvia and Iceland, which are countries comparable to Ireland, were outside the eurozone but they are dealing with fiscal crises every bit as bad as here -- if not worse.
"Joining the euro did allow the banks to borrow huge amounts of capital on international markets at low interest rates, helping fuel the bubble, but the currency also provided an anchor during the crisis."
Instead Dr Honohan pointed to policy failures once Ireland had joined the euro.
"We had three failures in policy when it came to adjusting to being in the euro. There were regulatory failures for sure, but there was a failure to keep wages under control as well as an over-reliance on volatile tax sources which dried up when the boom ended. If we had kept the income tax rates at higher levels then that would have been a good way of dealing with the issues."
Peter Dunne of the Central Bank pointed out the disproportionate role that sentiment plays in the Irish Stock Exchange.
According to research he carried out with his colleague, Rebecca Stuart, "sentiment effects in the Irish equity market largely mirror similar effects in other European markets but sometimes they are magnified in Ireland".