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Brendan Keenan: Ten years on, it is time to discuss the implications for Ireland and the euro

THE idea of leaving the euro is one of those things we are not supposed to talk about. Too dangerous, don't you know. Actually, it probably is dangerous. It is a matter of judgment how much risk is worth running in the interests of open debate .

But, surely, the same thing cannot be said of talking about staying in the euro? Yet the blanket of silence on that is, if anything, even more complete.

I recall being asked, in 1999, when we would know if the new currency was a success. I replied -- a bit glibly -- "Ten years from now." It was a way both of avoiding the question and putting it so far in the future that the answer was bound to be clear by then.

Slightly more than 10 years on, it is still far from clear -- but the question is becoming urgent. No matter what interdiction we put upon ourselves or others, we can hardly avoid talking about the euro this year.

In any case, even if we adopted a vow of silence, others -- the markets and the ratings agencies -- will keenly apply their analysis of the outlook for the euro to Ireland's situation. We will have to say something, and if it is not to be "Goodbye," we have to decide what it will be.

Actions, of course, speak louder than words and Ireland's actions to date have conveyed a message which has, to some extent, been heard.

The tensions in the euro area are manifesting themselves in three member states in particular -- Ireland, Spain and Greece. The focus for the moment is on fiscal positions and only Ireland has taken dramatic action to curb its deficit. That has been interpreted as a statement that the country is prepared to endure the severe recession which membership of the euro requires in circumstances like these.

Implications

Yes, you heard me -- "requires." To argue, as various people do, that classic stimulatory policies should be followed, rather than the deflationary ones actually being pursued, is to ignore the implications of the decision taken 11 years ago. Ignoring those implications played no small part in bringing us to this sorry pass. Ignoring them again will not get us out of it.

The unpalatable fact is that membership of the euro was the mechanism for our extraordinary bubble, and made the inevitable burst even more damaging. Given that fact, the fundamental question which must be faced is whether such a fate was inevitable, or could it have been, if not avoided, at least reduced in scale.

Could better policies -- devised specifically for euro membership -- have averted catastrophe? Until we have decided the answer to that, we cannot make rational decisions about the country's long-term strategy.

My colleague David McWilliams has neatly explained the problem of imbalances within the euro area with the simple simile of Paddy borrowing Helmut's savings for consumption and property investment.

But someone must borrow Helmut's savings if he continues to pile them up -- as he certainly intends to do. Either that, or endure a classic excess-savings/inadequate demand recession. In 2006, the combined balance of payment surpluses of Germany and the Netherlands were €170bn. Spain's deficit offset almost half of that, and we know where some of the rest of it went.

Was it possible for Ireland to say: "Well, we won't borrow your savings," -- or at least do something more sensible with the credit. It would help if the leaders of Europe got serious about managing their Great Experiment properly. There seems little chance of that, so a country like Ireland must swim against the economic tide such imbalances create.

It certainly has to try, and at least Ireland can't cause a euro area recession on its own by refusing to be a spender of last resort for the euro area. It must select economic targets to replace the ones it lost when it joined the euro. The best was the trade-adjusted value of the currency, which the Central Bank was able to maintain (in between currency crises) during the 20 years between the end of the link with sterling and the arrival of the euro.

The Bank, for some reason, has recently stopped publishing the inflation-adjusted exchange rate in its quarterly bulletins. It should think again. The Newry business has finally brought home the point that Ireland cannot ignore currency developments and that it must make domestic adjustments in response to sterling movements -- both favourable and unfavourable.

Difficulty

A large part of the difficulty was that almost everything was favourable from 1999-2007. We made the most of our good fortune, when policy should have been to take away the punch bowl. The rise in sterling, for instance, could have been met with higher business taxes and lower consumption taxes to modify the higher growth and inflation consequences.

Yes, I can see the problem. But even that is not the end of it.

The only other lever of economic management, apart from taxation, in a monetary union is incomes. The social partners would have to accept that real wages can fall as well as rise -- around a long-run trend which can hardly be more than 2pc a year.

Other folk may be able to come up with better ideas than these crude suggestions. We must, however, recognise that even the best such measures are of limited value in an open economy.

They are far from a perfect substitute for a targeted real exchange rate. But euro or no euro, that option might not be available to Ireland anyway.

What we can say is that we will do the best we can -- which would mean overturning at least 30 years of actual economic policy. An analysis in the last ESRI quarterly found that, apart from the three years 1987-89 and 2003-04, fiscal policy has been "decidedly pro-cyclical" through all that period, amplifying both booms and busts.

New micro-economic policies, whether on wind energy or drugs research, will not be enough if we are to have any chance of prospering in the euro area. There will have to be a consensus on a macro-economic framework required to achieve the maximum possible stability in this most volatile little economy.

The exigencies of the crisis mean such ideas are not relevant just now. But nothing which would address the strategic difficulties we face is on offer from any political party or social partner. Even if we prefer not to mention it, sooner or later -- probably sooner -- others will begin to notice.

Irish Independent