Monday 18 December 2017

We haven't lost our sovereignty because we never really had it

The sight of Ajai Chopra and his colleagues in the troika taking the short walk to the Department of Finance on Merrion Street has been one of the most controversial images of the bailout.

For many, the sight of foreign officials on their quarterly visits to Dublin to monitor the Government's management of the economy, the public finances and the banks, in the way agreed, is a repeated confirmation of how Ireland has lost its sovereignty.

Inevitably, it is perceived that for a country whose history is steeped in its battles to gain sovereignty, the goal of returning to the bond markets in full this year, and thus exiting the programme, is driven by a desire to regain economic independence.

This line of argument has become common in the public debate in Ireland, but it is largely misplaced. It ignores the historical evidence that Ireland has been unable to manage its own economic fate responsibly, as evidenced by the two fiscal crises in the space of a quarter of a century. In this case, one has to be careful what we wish for.

Possibly due to the historical baggage, Irish leaders have struggled with the notion of economic sovereignty for much of the period since the foundation of the State. Economic independence took precedent for the first few decades of the new Irish State to the expense of the financial well-being of the Irish people at the time. More recently, the notion that a country as small as Ireland has full independence over its economic decisions has become highly questionable in an increasingly globalised world.

In addition, membership of the European Union places restrictions on a whole swathe of different areas from fishing rights to bog-cutting. More importantly, Ireland has long given up its authority to set policy in two of the most important economic areas – interest rates and exchange rates.

Ireland's tax policy has been repeatedly scrutinised, and sometimes criticised, by the United States, its most important foreign investor. While no foreign government in the developed world would insist publicly on a change in policy in another sovereign state, Ireland would undoubtedly have to make compromises if any pressure was exerted behind closed doors. Or risk the consequences.

Bond markets are another restriction on a borrowing country's ability to make independent decisions. Once a country decides to borrow money from international markets, its decisions are scrutinised, with poor choices being punished by way of higher borrowing costs and resulting financial pain.

The crisis in the euro area has shown how heavily indebted states are beholden to the markets, with heavy market pressure being inevitably followed by commitments by policymakers and politicians to make decisions to rectify perceived problems.

This is a poorly understood concept, probably due to the fact that no one wants to think about the notion of decisions being made in Ireland to please well-paid financiers in London or New York.

It is clear therefore that Ireland faced restrictions on the decisions it made even before the arrival of the troika, albeit in a less visible way.

If Ireland is successful in convincing markets that it is creditworthy again and says goodbye to the troika, the changing Economic and Monetary Union (EMU) will place increasing restrictions on the decisions that its members will be allowed make unilaterally.

The December Budget spectacle will become an irrelevance as budgetary plans will have to be debated and vetted at a European level well beforehand. Budget giveaways such as those during the boom period will become a thing of the past. Despite being protected in European treaties, many battles will have to be fought by Irish officials on the issue of corporation tax.

There is no going back. It was a democratic decision to join the euro and Ireland has already voted in favour of most of the enhanced coordination of policy by ratifying the Fiscal Treaty last year.

This may all appear that Ireland has placed itself in an economic straitjacket, but these facts do not have to be perceived as an all-around bad thing. An inability to go on policy solo-runs may prevent repeats of excessive growth in public spending or the imposition of an unaffordable bank guarantee, for example.

We must also not forget that while some of the policies insisted upon by the troika over the past two years can be rightly criticised, particularly those relating to the banking sector, external oversight has ensured that a number of policies have been implemented that otherwise would not have been.

Untouchables have become touchable and while there has been some public discontent, external oversight has given some political cover to the Government for the decisions that have been made.

The end of the official programme of support has its own risks. Will reform-fatigue set in if strict targets are not present? Will the Government start thinking about the next general election in 2016 rather than making decisions that will be in the medium and long-term interests of the country? Without strict oversight, there are clear incentives to do so.

While Ireland has received much praise by policymakers for its efforts and continued adherence to troika targets, the country is far from out of the woods.

The banks are still heavily reliant on the support of central banks, public debt is rising to record high levels, the budget deficit is still one of the highest in the eurozone and the personal debt problem in Ireland is far from resolved.

In other words, there are more hurdles to cross before Ireland gets to its final destination.

With this in mind, Ireland would do well to agree a funding backstop with the troika or sign up to the ECB's bond-buying OMT programme beyond the end of this year even if it does have to be accompanied by certain terms and conditions that may limit our power to control our own destiny.

Dermot O'Leary is chief economist with Goodbody

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