Tuesday 20 February 2018

We can't refuse to jump hurdle in EU steeplechase

If Italy borrows directly from the ECB then fiscal union won't be far behind, writes Brendan Keenan

IHAVE been recalling, in the sister newspaper, the day in March 1979 that the Irish pound parted company from sterling, after a union lasting more than 150 years.

I'm not sure that I would necessarily have remembered the occasion, except that Jim Callaghan's Labour government fell the day before, and Airey Neave, Mrs Thatcher's close adviser and spokesman on Northern Ireland, was killed by the INLA the day after.

Quite a week. After that, the UK Conservatives enjoyed 18 years in office, followed by 13 years for Labour, while the peace process and power-sharing finally brought the Troubles pretty much to an end. But the currency question is as alive as ever.

Looking back, most economists would explain many of Ireland's past woes by saying the punt was grossly overvalued for most of those 150 years, because industrialised Britain was far more productive than largely agricultural Ireland.

Only from the Sixties, when foreign firms boosted Irish productivity and Britain was in relative decline, could one say that exchange rates reflected anything like economic reality. Perhaps that made it possible in the Seventies to contemplate not devaluation but revaluation.

The main argument in 1979 for joining the European monetary regime without sterling was to get away from the inflation and regular devaluations which had plagued sterling, as compared with Germany and its neighbours.

We had 20 years of that regime which was (and still would be, if it were available) Ireland's ideal arrangement. But there were bound to be crises if sterling fell below what the market thought was a competitive rate for Ireland, or went so high as to produce severe inflation from dearer imports.

There were crises, and devaluations, so that the arrival of the euro in 1999 looked like an opportunity for calm and stability. Ha! Yet the great fear was not the bubble and burst which followed, but prolonged depression if sterling continued its long decline against the mark, with the euro, destroying Ireland's competitiveness.

Mrs Thatcher, who took office just weeks after that historic parting of the ways, stopped the rot and we wrecked our own competitiveness with inflationary pay awards and government spending.

There is no calm or stability to be found in any conceivable Irish currency regime. The surprise, after all that has happened, is that we do not pay more attention to making a success of the one we happen to be in.

After last Thursday's EU agreement, the reality is that the euro will be our currency for as far as the eye can see. True, the agreement was on principles and the details were scant, but the principles are fundamental. Countries can restructure their debt, bondholders can be burned, the high credit ratings of some countries can be leveraged to provide insurance for future bondholders. All previous principles are inoperative.

The crisis is far from over. Commission President Barroso is right about one thing -- this is a marathon, not a sprint. Perhaps a national hunt steeplechase would be a better metaphor (a long course punctuated by regular, near-impossible hurdles), though Mr Barroso may not be familiar with those.

But Europe's leaders are determined to ride it. Becher's Brook may be coming up, if Italy or Spain find that they cannot borrow what they need on the markets. Michael Noonan, as is his custom, dropped a tantalising remark, suggesting that the new ECB president, Mario Draghi, may be signalling a change of policy in the ECB's fundamental objection to lending directly to governments.

On this question, the old joke about laying economists end to end and never reaching a conclusion, falls flat. Instead, there is almost complete consensus. More to the point, should Italy find itself unable to pay its bills, there is no other mechanism which could provide the cash. Should that happen, fiscal union cannot be far behind.

All this means that Ireland is no longer on the periphery. It is central to the project. It must show the way that others have to follow -- cutting deficits and costs, and increasing efficiency -- without the newly fashionable panacea of devaluation.

There will be assistance in the task, as the Government is well aware, because Europe cannot afford to have us fail. It does not take a suspicious mind to think it more than coincidence that Merkel praised Ireland, and the Taoiseach mused on treaty change, on the same day.

Fortunately, assistance will not be the much-vaunted cash handouts available to uncompetitive regions of nation states. Experience shows that, while these treat the symptoms, they make the disease more malignant.

We can reasonably expect further reductions in costs -- banking costs being the obvious choice -- which will make success possible, although nothing can make it easy. The handicap will be lowered, you might say, but after that it is up to horse and jockey.

Sunday Indo Business

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