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The euro currency: let's start again

The project to integrate Europe economically and politically dates back more than 60 years. The vision of politicians, especially French and German, to create supranational structures ensuring peace and prosperity after two European civil wars in the first half of the last century has been the motor of European politics ever since.

The progress toward European integration has been an extraordinary success when placed in historical context. A limited agreement between just six states (France, Germany, Italy and the Benelux countries) covering only the coal and steel industries in 1950 has evolved into a single market and democratic political community of 27 countries embracing virtually all of Western Europe, the former Communist states in central and eastern Europe and ex-dictatorships to the south. Steady enlargement and the smooth construction of the single market have been great political achievements.

But the fall-out from the eurozone banking crisis and the continuing failure to address the issues decisively has made 2011 a terrible year for the project of European integration. An atmosphere of mutual disregard and blame-shifting feeds populist xenophobia in a vacuum of political leadership. More than just the survival of the common currency is at stake: the sustainability of the integration project itself has been called into question.

The flagship project of 'ever closer union' has been the single currency, advocated since the Fifties as the ultimate step on the way to political union and embraced by 17 of the EU's 27 members. Several of the 17 must regret their decision: even the common currency's supporters must now concede that it was premature, poorly designed and has been badly managed.

Euroscepticism is not just a British phenomenon. Giving up the Deutschmark was never popular in Germany and the original Maastricht treaty was carried in the French referendum in 1992 by only 51 per cent to 49 per cent. There are now openly eurosceptic political parties in Finland, France and the Netherlands and voters throughout Europe have begun to perceive European institutions as foreign rather than shared. There is a justifiable perception that European leaders, including in particular France, Germany, the EU Commission and the European Central Bank, have failed persistently to get ahead of the banking crisis and have mismanaged the common currency's first big test. This fuels a reversion to nationalism and a willingness to reject European integration as an elite project. The European Central Bank has appeared more concerned about its independence than about its accountability. The botched summit of October 26 has raised again the prospect of a two-speed Europe, with continued progress toward integration for the countries of the eurozone, if all goes to plan, while the United Kingdom and several others remain semi-detached. These are ominous and unwelcome developments for Ireland, whose interests are not served by tensions between Britain and Europe.

According to figures reported in last Monday's Irish Independent, Irish emigrants continue to choose English-speaking destinations, euro or no euro. The three most popular were Australia, the United Kingdom and the United States. Germany, Europe's largest economy and just two flying hours away, attracted one-third the numbers of Irish emigrants who headed for tiny New Zealand, at the other end of the earth.

It is clear that Ireland may share a common currency, but does not share a common labour market, with the continental eurozone countries. When Ireland was attracting net immigration during the bubble, the newcomers did not originate in eurozone partners either: at the 2006 census, just 10 per cent of the 420,000 foreigners resident in Ireland came from countries in the eurozone.

Of all the countries sharing the common currency, Ireland conducts a greater share of its external trade outside the currency bloc than does any other member. The substantial numbers of foreign-owned businesses and banks in Ireland are mainly American and British, rather than French or German. Judged on the patterns of trade or on the origins and destinations of labour and capital flows, Ireland is an Atlantic, rather than a continental European, economy.

Notwithstanding these patterns of trade and of labour and capital flows which are long-established, Ireland's decisions to scrap the independent currency in 1999 and to adopt the euro were pretty unanimous. The main political parties were in favour, as were the principal business, labour and farming organisations. But most economists who expressed a view on the issue were cautious, particularly since it was clear that the United Kingdom was not likely to join. No commentator foresaw fully the disaster that would unfold for Ireland: a decade of excessive spending growth, exploding bank credit and a spectacular property bubble were not part of the deal. It is reasonable to argue, given the entirely inappropriate policies pursued, that the decade would have ended badly even outside the euro. The capacity to pursue these inappropriate policies was, however, enhanced through membership of the currency zone, and the bubble would likely have been smaller, and the fall-out easier to manage, with an independent currency.

Banks, business corporations and finance ministries throughout Europe and beyond have been quietly preparing contingency plans for a euro break-up and some financial analysts are predicting just such an outcome. It would probably follow a failure to refinance

the enormous Italian and Spanish debt rollovers arising in 2012. The Italian bond auction on Thursday did not go well and there will be repeat examinations for the credibility of the common currency at weekly intervals in the months ahead. If the euro was to disintegrate, would Ireland have a choice of currency regime again, and what options are available?

There is no soft-option rerun of the decision to scrap the independent currency. A disorderly break-up of the eurozone would be an unprecedented policy calamity and an orderly dismantling would be unmanageable. Specifically, any notion that Ireland's debt burden could be magicked away through a euro break-up is wishful thinking. Given the extent of the political investment in the common currency, disintegration is pretty unlikely. The economic and political costs would be horrendous and the instruments to avoid this disaster are available. The most probable outcome is that the European leadership will do what is needed. This is also the best outcome for Ireland, even if the decision to join the single currency in the first place was not the best one. Currency unions have broken up before (both the rouble zone and the Jugoslav dinar zone broke up, in chaotic fashion, 20 years ago), but break-ups can go horribly wrong.

It has been acknowledged, most recently by Minister of State Brian Hayes, that contingency plans are being prepared by the Government, and that is reassuring. It is sound policy to hope for the best while preparing for the worst. A possible and obvious contingency plan for Ireland might involve the use of sterling for a transitional period, followed eventually by the reintroduction of an independent currency. This was precisely the course followed after the establishment of the Irish state in 1921. No separate currency was introduced until 1927 and the exchange rate was set at one-for-one with sterling from 1927 until 1979. Twenty years later the independent currency was finally abandoned, after a 52-year life-span, with the adoption of the Euro from January 1999.

A disorderly break-up of the eurozone -- and an orderly break-up is difficult to envision -- is in nobody's interests. It does not follow, even if it is conceded that we might have been better off staying out, that Ireland can painlessly engineer some kind of elegant exit from the common currency. A temporary resort to sterling might have to be undertaken if the euro breaks up disruptively, but a far better outcome would be the early adoption of measures to secure the viability of the currency regime we chose to join in 1999. This is not to deny that Ireland might have been better off without the euro, the way things have worked out.

The European project might have been better off, too. There is an irreversibility about a common currency regime that does not apply to measures eliminating trade barriers and freeing the movement of labour and capital, which can be adjusted and timetabled as circumstances alter. Once countries have abolished their currencies, the new regime had better work. It needs to be well-designed, well-managed and robust in the face of the inevitable financial crises. The common currency has failed these tests and must now be re-engineered. The alternative is a destructive crisis for the core European project.

Sunday Independent