Whilst we witness the awful events unfold relating to Ireland’s economic difficulties, it is vitally important, for democracy in the future, that the mass of the voting population acquires a basic understanding of the mechanics of this disaster.
Following on from my previous post on the warnings by Mrs. Thatcher, I was about to write an article, using the Republic of Ireland as an example, depicting the link between National Sovereignty, democracy, currency and the ultimate prosperity of a Nation. Then yesterday, I read Newton Emerson’s excellent article in the Sunday Times. When I read it, it made me wonder if it was possible to solve regional inequality by setting up different regional currencies within a sovereign state. Then I thought the better of it. The best that a Nation can do about its regional inequalities is to have regional development plans to address it.
In the United Kingdom, it was the Conservative Party which led the way with regeneration policies for inner urban areas in the 1980s. Today, it has a long-term regional development policy for Northern Ireland. At the heart of that policy is the proposal to bring down the rate of Corporation Tax. Will Northern Ireland’s politicians grasp this nettle? We shall see.
As there is no free link to the Times website, I have reproduced the full text of Emerson’s article below in coloured font:
The prospect of Northern Ireland’s corporation tax going down, just as the republic’s may be forced up, has huge implications for the relative competitiveness. There are problems and opportunities galore, and a large number of individuals will be personally affected, but the plain fact is that with three quarters of all economic activity directly due to public spending, and welfare not developed to Stormont, Northern Ireland looks to British budgets rather than Irish business for its economic fate. And the dole cheque is still expected to arrive.
That leaves people free to discuss the constitutional ramifications – always the preferred northern pastime. “Could the republic actually afford unity, now or ever?” mused one Belfast Telegraph headline. ‘Partition hampers the economy,’ Sinn Fein is increasingly wont to claim. Talk of a British bailout has raised the usual eyebrows.
It is all tired, predictable nonsense. There is no correlation between the strength of republican sentiment and the strength of the southern economy. The financial implications of Irish unity can be argued either way, and no financial argument persuades either side. Nationality is above) or perhaps beneath) economics.
There is one grown-up discussion on economic sovereignty that can be shared across the border. Northern Ireland is a text-book case of the problems of a currency union. Indeed, it is such a glaring illustration that it is almost rude of the south to have ignored it before joining the euro. Like most big countries, the UK suffers from having one currency across the disparate regions, without an exchange rate, varying productivity can be reflected only by prices and wages, which are rarely flexible enough to do the job. So the less productive regions end up with higher unemployment, while the more productive regions end up with higher taxes.
This is the internal bargain all nations strike, but it is rare to find such a clear example as Northern Ireland. Because of its huge public sector, whose wages are often agreed nationally, Northern Ireland has too many people expecting British pay in British pounds with no allowance for the geographical consequences of their Irish location.
Many public-sector workers get a London weighting, but there is no equivalent Belfast lightening. Instead, throughout Northern Ireland, there is persistent long-term unemployment, the UK’s highest level of economic inactivity, and a subsidy of about £10 billion a year, more than the one-off bailout London is considering for the republic.
As well as contributing to these problems, currency union denies even a region as developed as Northern Ireland the tools to solve them. Stormont is unable to print money or set interest rates, but it also has little scope to vary taxes because of the legal, political and practical problems of having different fiscal regimes under the same currency. The possibility of lowering Northern Ireland’s corporation tax has been debated for years, but it will still require London’s permission. Even then, there is no guarantee of getting it past the European commission.
When such policies are discussed, Stormont’s status as a glorified county council becomes apparent. This is precisely the status Dail Eireann acquired when Ireland joined the euro. It may have taken a crisis to make it apparent but the surrender of economic sovereignty was complete from day one.
Taxes and public sector wages have not yet been harmonised across the continent, but convergence is the inexorable logic of the euro, whether it is hastened by a bailout or not. If Ireland is rescued, it will be rescued as a region, and compensated by subsidy for being a region. It will be just like Northern Ireland.
However, in many fundamental respects, the republic’s position within the eurozone is worse than the north’s within the UK. The republic is a smaller part of its currency area by GDP and population. It is less connected to the eurozone’s centre than Northern Ireland is to the Southeast of England. The eurozone is an expanse of 16 countries encompassing far more economic variation than is found within the UK, which makes a one-size-fits-all monetary policy that is much less likely to fit any one in particular. Finally, Northern Ireland still has the relative flexibility of sterling, whatever its imperfections.
Since the recession began, every British employee has taken a 25% pay cut compared with the UK’s main trading partners. Few even noticed it happening. In the republic, with no exchange rate between most of its trading partners and the euro-sterling rate going the wrong way, public and private employers have had to cut salaries directly – a process that is slow, demoralising and politically toxic.
Perhaps it is a bit much to expect those in the south to look north for any kind of lesson, but it is surprising that they do not recall their own quite recent example. Between 1979, when it uncoupled the Irish pound from Sterling, and 1999, when it joined the euro, the republic had a freely floating currency.
It was not meant to float quite as freely as it did – the ill-fated European Exchange Rate Mechanism was supposed to keep it within bounds. It swung all over the place, going considerably below and above sterling and depreciating significantly against the deutschmark.
This helped Ireland’s competitiveness when foundations for its growth were laid down. It also imposed enough financial discipline on Irish governments to stop them bankrupting the country. Floating currencies start to sing, rather quickly and obviously, under the weight of excessive spending and borrowing. It was enough to rein in even Charles Haughey.
It is one of the great ironies of the euro that it is promoted as a means of enforcing financial discipline. Instead, it has become a means of running up enormous debt without the symptoms showing until it is too late. The republic’s history proves it, and also disproves the common claim that without the euro it would have ended up like Iceland. This puts the cart before the horse. Without the euro, the republic would never have got into as much trouble as Iceland in the first place.
Still, there they are – or “we are where we are,“ as Brian Cowen, the Taoiseach, so eloquently put it – with no visible route back to a currency of their own. Recessions and depressions come and go, but Ireland’s financial sovereignty is gone forever.