Withdrawal and Expulsion from the EU and EMU Post author By Philip Lane Post date December 18, 2009 This is an interesting paper from the ECB on the legal dimensions of these scenarios. Categories In EMU Tags EMU 28 Comments on Withdrawal and Expulsion from the EU and EMU ← Energy Prices In Ireland → Safe and Sound Banking: A Role for Counter-Cyclical Regulatory Requirements? 28 replies on “Withdrawal and Expulsion from the EU and EMU” The answer’s “NO”, in case you don’t want to read the paper… An interesting link. The arguments in the paper can be read as applying to a number of potentially relevant scenarios, including voluntary withdrawal from the EU by a Member State, expulsion of a Member State from EMU and/or the EU, and the scenario which might be seen as having some attractions for Ireland in its current exchange rate predicament, where a country might want to leave EMU while remaining in the EU. The paper dismisses this as an available option, given that the commitment to enter EMU is a legal obligation (the texts refer to the ‘irrevocable’ fixing of the conversion rates at which national currencies are to be exchanged for the euro, and to the irreversibility of the process leading to the adoption of the euro). Thus, the conclusion is that leaving EMU would only be possible in the context of leaving the EU and a renunciation of all EU membership obligations. @ Alan Matthews “Thus, the conclusion is that leaving EMU would only be possible in the context of leaving the EU and a renunciation of all EU membership obligations.” The “Ireland Out of the Eurozone” campaign has always been an insane logic, unfortunately persued by previously level headed types like David Mc Williams for reasons that are still unclear. Hopefully documents like this can put the matter to bed once and for all. Without the Euro we’d simply be another more tragic example of what Iceland has already become. The EU is better than not having some discipline on the government at all! Caan you imagine what they would get up to? We actually might have to act then. This issue will not go away and I predict that it will get bigger as the depression bites! @ Bond, Eoin Bond Have you considered, that despite the splatter, Iceland may be better off in the long run, because they medication is alot more painful? Whereas, we may have to act in others interests (ECB, etc) and this may delay our return to a more natural position>? Al A ‘more tragic example of what Iceland has already become.’ Maybe not. Pierre Cailleteau, an economist at Moody’s has compiled a ‘misery index’. “The index adds together a country’s budget deficit, as a percentage of gross domestic product, and its unemployment rate. It captures the current conundrum for many countries: their economies need stimulus, but their budgets may not be able to afford it.” According to this index Iceland is in better shape than the U.K., Ireland, Greece, Latvia, Lithuania and Spain. http://www.nytimes.com/2009/12/19/business/economy/19charts.html @ Calan The misery index only provides one angle on misfortune and the Icelandic fiscal deficit of 6.6% in the nine months to Sept, does not for example take account of significant future external liabilities in respect of the failed Icesave bank. Iceland’s economy contracted 5.7% in the July to September period compared to the second quarter. Exports fell by 25.9% in the 12 months to Oct while the krónur depreciated 41.9% against a basket of currencies. Iceland has the potential to gain from devaluation longer term as its main exports are a commodity, aluminum, that has a global dollar price and marine products. Ireland’s main merchandise exports are chemicals and medical devices, produced by US firms. No American exporter from Ireland has suggested we should abandon the euro – – are they missing something? MH. I’m not suggesting we abandon the euro, but Iceland’s unemployment rate is less than Irelands. “the Icelandic fiscal deficit of 6.6% in the nine months to Sept, does not for example take account of significant future external liabilities in respect of the failed Icesave bank.” Neither does Ireland’s fiscal deficit of 11/12% take account of future external liabilities in respect of the failed Irish banking system. Three points: EMU Has Been and Continues to Be a Disaster for Ireland a. The Eurozone, as currently constituted, is not an optimal currency area. b. EMU membership is at the root of our boom (1997 – 2007) and bust (2008 – ?). It’s a similar story for Spain and Greece. c. Applying a Taylor Rule approach indicates that, having “enjoyed” a decade of EMU interest rates that were too low (19997 – 2007) we now face a prolonged period of EMU interest rates that are too high (at a time when we are massively overindebted). The Terms of Continued EMU Membership is Largely a Political Question a. The ECB study is very interesting in its timing and implicit recognition that EMU exit is an option now being considered (even if the ECB suggests that that option is not a real or a lawful one.) b. The bible of international monetary law “Mann on the Legal Aspects of Money” (OUP – it’s in the TCD library) makes clear that every sovereign state has the power to determine its own currency choice. As a sovereign state therefore, Ireland can revert to monetary and currency independence (and exit EMU) if it so decides. c. The question of breaching exiting treaty obligations would arise. But any sanctions triggered by such breaches would essentially end up being political questions (such as what to do about German war reparations between WWi and WW2). The Process of Exiting EMU Would be a Nightmare a. If we exited, it would be to devalue. If people got wind that this decision was in the offing (through leaks, emergency and closed meetings of the Oireachtas being summoned etc) the rational response would be to withdraw Euros from Irish banks and move them off-shore (or to Newry) where they would be free from the effects of devaluation. A run on Irish banks and traffic congestion in North Louth would be the results. b. the bulk of the loan assets and deposit liabilities of Irish banks would be renominated into the Punt Nua but the Irish banks’ interbank loans raised in Euros would (presuming they are governed by UK law) remain Euros. The Irish banks would, at a stroke, be rendered heavily insolvent. Conclusions 1. Kevin O’Rourke has elsewhere described EMU as like a roach hotel: easy to check into / impossible to get out of. It certainly looks like that. 2. But where there is a will there is a way. The question is whether we can summon the will. I strongly doubt it. It would require fresh thinking and regime change throughout the Irish establishment (and not just in Dail Eireann). 3. If we plan on staying in EMU (by far the most likely scenario), then should we not boost our bargaining stance by highlighting the economic damage which EMU, by its systemic flaws, is inflicting on Ireland/Spain/Greece? EMU membership is at the root of our boom (1997 – 2007) and bust (2008 – ?) Cormac, And what would you ascribe the first period of monumental mismanagement in the history of the State from 1977, to? Reckless politicians? David McWilliams claims a 10% devaluation in 1993 triggered the boom; you say the pressure to align interest rates from 1997 and then EMU rates from 1999 was the cause. You may well believe what you say but given the disreputable role of your party, the PDs, as cheerleaders of FF, along with the constituency and personal support bartered with “independents” (a special tax-free annual allowance of €41,000 was granted by the Government to each of these supporters in 1997), the argument seems a little convenient. Please explain, what interest rate margin above the ECB rate would have prevented the subsequent misery and how we would have avoided the fate of Iceland? Would our interest rates have been as high as Iceland’s or tied to sterling? Who hugely extended the property tax incentive schemes; halved capital gains tax; withdrew changes in tax relief on property investment lending after pressure from the building industry? It is just not credible that we would have had an independent monetary policy with central bankers willing to stand up to politicians. An example of the Tammany Hall style of governing, was the lucky dip decentralisation “plan” and the PDs also went along with dividing the spoils: Welcome to Parlon Country. And these same people would have acted with prudence with hot money attracted by a high interest rate premium, flooding in! Have you not forgotten that we thought we had invented the free lunch? Denmark, one of Europe’s most successful small economies, has had its currency effectively fixed to the euro since 1998. Is not the main difference between Ireland and Denmark, is that we have a failed governance system of limited accountability? @ Alan Matthews Leaving aside for a moment the desirability, or otherwise, of opting out of EMU. Your conclusion: …. “where a country might want to leave EMU while remaining in the EU. …. The paper dismisses this as an available option, given that the commitment to enter EMU is a legal obligation. Thus, the conclusion is that leaving EMU would only be possible in the context of leaving the EU and a renunciation of all EU membership obligations.” This does not seem to be supported by: “This paper concludes with a reminder that while, institutionally, a Member State’s membership of the euro area would not survive the discontinuation of its membership of the EU, the same need not be true of the former Member State’s use of the euro.” And: “Negotiated withdrawals are, in principle, always possible.” See the landmark 1868 ruling of the US Supreme Court in Texas v White (74 US 700), supporting the proposition that while the US Constitution prohibits unilateral secession (and by implication expulsion) one or more states may be allowed to leave the Union with the consent of their peers. See also Berglund, p. 150; Thieffry, pp. 15-17; and Article 54 of the Vienna Convention on the Law of Treaties. Whilst withdrawal from EMU may seem like “insane logic” to some, we are faced with a situation unprecedented in our economic history and all ideas should be examined. Conventional wisdom landed us in this mess and it could possibly be “the road less travelled” which gets us out of it. “Beaten Paths Are For Beaten Men” It’s useful to remember that in the eight years, 1993–2000, Ireland had a growth rate averaging 7 per cent a year. One of the most important reasons for this period of economic growth was the fact that we devalued our currency by 10 per cent in 1993 and allowed it to float against the currencies of our principal trading partners. This gave Ireland a very competitive exchange rate, which boosted exports, helped keep out imports and led to a high rate of economic growth and output. IMPORTANT: At the time, politicians of all parties and most economists were opposed to devaluation without the UK being in it also. They finally went ahead in the belief that the UK would join inside a year or two. Irish export figures January–November 2008 (Millions) Total worldwide 79,873 Total Eurozone 32,286 Total outside euro 47,587 Irish import figures January–November 2008 Total worldwide 52,794 Total Eurozone 13,453 Total outside euro 39,341 By joining the euro, we tied our currency to an area outside that of our two major trading partners (US & UK), while they continue to have the freedom to pursue independent exchange rate and interest rate policies. When we joined EMU we ended up with a situation where unsustainable interest rates were being imposed upon us by the European Central Bank in Frankfurt. So, when we needed higher interest rates in 2003–2004, we were powerless to do anything about it and subsequently ended up in the current mess. Membership of EMU is proving to be of far greater benefit to our bankrupt and crooked bankers than it ever was to the wider populace. In fact it looked for a while as if the ECB was going to facilitate these same bankers to pull off the most audacious scam of all, whereby they were going to be allowed to ‘park’ their reckless gambling debt with the Irish taxpayers AND, this is the most incredible bit, they were also going to be paid for them. The rationale by the bankers who were proposing this outrageous plan was; “This is the ONLY option. You need us because you need a working and fully functioning banking system.” This was a bit rich coming from the very same people who destroyed that system in the first place, but then again brass neck was never a problem for our reckless bankers. We all better wish our Finance Minister a speedy recovery as he has a lot of ‘sorting out’ to do in the New Year. Michael, 1. The main difference between Denmark and Ireland (in explaining our current economic status) is that Denmark quite readily fits into an optimal currency area that has German as its anchor tenant. We don’t. 2. “It is just not credible that we would have had an independent monetary policy with central bankers willing to stand up to politicians.” The logical end-conclusion of that assertion is that we are incapable of self-government. I can see some arguments for that standpoint but I profoundly disagree. I prefer people to take responsibility to outsourcing it. I prefer smaller government units to larger ones. I prefer national self-government to government from abroad. It’s not perfect but – in the long run – it will be better. I fear that key people in the Department of Finance drew the conclusion after the 1979-1987 disaster that it was better to outsource key elements of economic policy to the EU and to then throw away the key. Our membership of EMU without the UK was the result. We now live with the consequences. 3. “Please explain, what interest rate margin above the ECB rate would have prevented the subsequent misery and how we would have avoided the fate of Iceland?” Answer: a policy rate appropriate to our conditions such as based on the Taylor Rule. See this 2005 piece by Rossa White of Davys for more details: http://www.davy.ie/content/pubarticles/wmccr20050124.pdf 4. You object to “Tammany Hall” aspects of Irish politics. So do I. But having closely observed politics here, I have come to the conclusion that Tammany is part of our national culture. Let’s not forget that Tammany was originally set up in New York by people of irish extraction. One can rail against this phenomenon and fulminate and froth but to what end? Better to get into the political system and work against it. Another part of Irish culture which I object to is our parochialism. If something goes wrong in Ireland it must because the Irish government or some other Irish elements caused it to so happen. The notion that we are experiencing EMU-induced problems that are also afflicting Spain and Greece – in the same way, at the same time and to a similar extent – is for such people an uncomfortable / unfathomable fact. After all, it’s so obvious that FF, the PDs and Tom Parlon got us into this mess, isn’t it? Anything to avoid taking responsibility for our own actions. As John Kenneth Galbraith put it (“The Great Crash: 1929”): “No one was responsible for the great Wall Street crash. No one engineered the speculation that preceded it. Both were the product of the free choice and decisions of thousands of individuals. The latter were not lead to the slaughter. There were impelled to it by the seminal lunacy which has always seized people who are seized in turn with the notion that they can become very rich.” Cormac, I would acknowledge that there is very seldom a single explanation for economic outcomes. If there had been no global imbalances; savings glut and related international credit boom, the outcome would have been different. A higher rate than the ECB’s 2% rate, would have been better but as I said, given the history, I’m not convinced that we would have been more prudent than Iceland. The Bank of Spain insisted on dynamic capital provisioning and the big Spanish banks took risk more seriously than in other countries because of their experience in the 1980s. @ Cearbhall O’ Dalaigh One of the most important reasons for this period of economic growth was the fact that we devalued our currency by 10 per cent in 1993 and allowed it to float against the currencies of our principal trading partners. A devaluation of just 10% appears to have worked wonders compared with the huge inflow of big American exporters. Have a look at the chart from a Central Bank 2005 paper here, which shows exports from Irish-owned companies flatlined from 1990 through the decade. Home Truths on Irish Exports as Ireland faces a changed global economy in the decade ahead Caution is always required with Irish export data: Decisions on the destination of most Irish exports are not made in Ireland and the import content for multinationals would be higher than say for local food producers. The foreign companies have not signalled a preference for the return of the punt and possibly double-digit interest rates with the knock-on effect on wage demands. Dr. Garret FitzGerald wrote in the Irish Times in 2006 that during the brief Celtic Tiger period from 1993 to 2001, our living standards rose by one-half. But this was due to two special factors – both of which were essentially temporary in character. The first was the impact upon our national productivity of a quite exceptional inflow of new US investment. For a number of years Ireland, with only 1 per cent of Europe’s population, attracted up to 25% of all US greenfield industrial investment in our continent. The new technology and skills that this inflow brought contributed to a 4% annual increase in output per worker at national level, ie productivity. The second factor, which played an even larger role in boosting our living standards during this time, was the huge increase in the total number of people at work, and the corresponding drop in the proportion of dependants in our population. Several factors contributed to this: the exceptional inflows of young workers emerging from the educational system and of women transferring from “home duties” to the labour force, and also the flow of unemployed people returning to work and of recent emigrants coming back to jobs here. Within a decade these inflows into our labour-force reduced from 230 to 115 the number of dependants that every 100 workers had to support, either directly within their families or indirectly through taxation. Finally, I state again, that I have not come across any credible argument that Ireland outside the euro would have avoided a fate similar to Iceland. When Rossa White, said in 2005 that the benchmark interest rate should be 6%, Iceland’s was 8%. A year later, AIB sold part of its headquarters to developer Sean Dunne, to boost its property lending. In the year 2003, when the ECB cut its rate to 2%, the Irish banks began ramping up their foreign lending. The Government and Central Bank were impotent? Not believable. Third last line should read: In the year 2003, when the ECB cut its rate to 2%, the Irish banks began ramping up their foreign borrowing. @ Michael Do you have solutions? Do you accept that we will have to EXPORT our way out of this situation? Are you totally opposed to devaluation as a tool for making us more competitive in foreign markets? Cearbhall, There are no simple panaceas with most advanced economies facing serious financial challenges. Some people highlight the opportunities in emerging markets. However, apart from niche areas, Asia would be a very difficult region for Irish companies and as for the B in the BRIC, Brazil, we haven’t endeared ourselves to them with our supprt for a EU ban on their beef. The first step for policy makers is to junk the delusional marketing spoof and vacuous superlatives. We need to be very honest ablout the serious challenges. I have written about this issue in recent days: The challenge of creating 160,000 new Irish jobs In the 10 years to Dec 2008, 4,000 net new jobs were added by foreign and Irish-owned firms in the international tradable goods and services sectors, while overall employment in construction, the public sector, retail and distribution, expanded by over half a million. Cormac You say that EMU has been and continues to be a disaster for Ireland. This can only be true because we did not choose to run the economy within the disciplines imposed by being a member of a currency union. Certainly, joining a currency union reduces the power of a sovereign state but there is much to gain if it the consequences are accepted and acted on. An interesting question arises. If we had more robustly regulated the banks and controlled the property market after the year 2000, things now be very different? We could have controlled excessive property lending through administrative mechanisms such as limiting loan to value and income ratios. We could have kept CGT on the gains from development land at 60%. We could have introduced a property tax to fund local government which would have moderated the growth in propoerty values. We could have removed the tax breaks for property in the 1990s. We could have done a lot of sensible things but as a soverign nation we chose not to. Being a sovereign nation we could pull out of the Euro certainly. It is a political decision to stay in just as it was to go in. It was also a political decision to run the economy as was done from the millennium on. Nations can make choices but must beware of the consequences. Surely we are now learning that lesson. Zeno wrote “You say that EMU has been and continues to be a disaster for Ireland. This can only be true because we did not choose to run the economy within the disciplines imposed by being a member of a currency union.” I don’t agree. We could enter a currency union with Nigeria or Japan if we wanted. It would not overcome the fact that such a currency union would cause significant dislocations because we do not form an optimal currency area with either country regardless of how disciplined we were. See Wikipedia for an introduction to the theory http://en.wikipedia.org/wiki/Optimal_currency_area Hong Kong’s tracking of the US dollar amounts to the same policy and is now causing a bubble in domestic HK property values even though HK is adhering to the “disciplines imposed”. The problem isn’t lack of discipline in operating the system. The problem is the system. Ireland could follow the lead of Argentina and simply walk away from it’s debts. Why should Irish taxpayers have to pay the foreign debts run up by a fairly narrow layer of our population? At the end of December 2001 Argentina defaulted on $100 billion of government debt. In January 2002, the plan that pegged the Argentine peso to the U.S. dollar on a one-to-one basis was scrapped, after nearly 11 years. The peso was floated and sharply devalued, losing 70% of its value in four months, which triggered a 40% surge in consumer prices. Argentina’s GDP declined by 11%, GDP fell to its 1993 level and on a per capita basis, to that of 1968. Unemployment rose to 20%. By April 2002 the first sector to recover was manufacturing, which had been operating at about half capacity. By the end of 2002 a measure of financial stability returned. In 2004 a long and complex debt restructuring process was initiated. Argentina offered a discount of 70% on its obligations and finally settled the matter with over 76% of its defaulted creditors (excluding the IMF, which continued to be paid on time). In December 2005, President Kirchner decided to liquidate the Argentine debt to the IMF in a single payment, without refinancing, for a total of $9.8 billion. The payment was partly financed by Venezuela, who bought Argentine bonds for US$1.6 billion. In 2006, Argentina reentered international debt markets selling $500 million of its five year dollar denominated bonds, with a yield of 8.36%, mostly to foreign banks and Moody’s boosted Argentina’s debt rating to B from B-. Much to the chagrin of Wall Street bankers, Argentina can rely on Venezuela for a large portion of its financing needs. Venezuela currently holds about $6 billion of Argentina debt. The Argentine economy is now showing strong annual growth of 9% and this has been sustained for five consecutive years (2003 through 2007). This stability was initially due to a surge in trade surpluses (over all previous historical records) and the sustained growth has been led by an over 300% jump in capital investment since the 2002 low. Unemployment levels are currently at about 8%. Once the debts had been written of, there was an immediate return of local and international confidence, this was followed by record public works investments and a vigorous prices and wages policy. Private sector employers have, since 2002, created over 3 million jobs and recovered median pay to over US$800 a month (about US$1,600, in purchasing power parity terms), close to Argentina’s historical average. This in turn has boosted local consumption by two-thirds in real terms, though foreign investment has only increased very modestly. Argentina’s manufacturing sector has recovered quickly from the crisis. Benefiting from an undervalued local currency that allowed industry to produce goods with competitive prices in the international market, manufacturing in general has grown by over 60% since 2002 and some long-suffering industries, such as textiles, furniture, machinery and publishing have more than doubled their output. Motor vehicle output, in particular, has jumped from a depressed 159,000 units in 2002 to a record 597,000 units in 2008 (auto sales have risen even more); amid the nation’s relatively mild recession, output will likely ease to around 500,000 units for all of 2009. Agricultural output has accounted for 9.4% of GDP and nearly one third of all exports. Argentine fisheries bring in about a million tons of catch annually and are centred around hake which makes up 50% of the catch, pollack, squid and crab. The government also undertook structural changes to the economy and this was a major reason for their success, in my view. The government firstly addressed deficiencies among certain public services which were privatised during the 1990s. They did this by revoking licences granted to private interests; the most prominent of which were the Postal Service, (2003), part of the railway system (2004), the water system serving Buenos Aires province (2006) and, most recently the National Airline. They also made similar moves in areas like energy. Private pension funds, which were first licensed in 1994, suffered large losses during the 1998-2002 crisis and by 2008, the state subsidised 77% of the funds’ beneficiaries, including 40% whose annuities could not cover minimum monthly pensions; of the funds’ 9.5 million affiliates, nearly 6 million had stopped making contributions. The 2008 financial crisis exacerbated the problem and in October, the government announced plans for the nationalisation of the funds’ investments of nearly US$30 billion, while leaving contributors the freedom to invest in private pension funds, which the central bank plans to purchase a minority stake in. The passage of this plan was accompanied by a package of incentives designed to make credit more accessible and to stimulate slowing domestic growth, as well as expanded export and loan subsidies and a US$32 billion public works program for 2009-2010. Following six years of the fastest, sustained economic growth in over 100 years, the program has largely helped to stave off recession, though GDP slid by 1.5% for the 12 months to July 2009, and domestic, private sector demand fell by around 4%. Europe’s small, debt-strapped countries could follow the lead of Argentina and simply walk away from their debts. That would shift the burden to the creditor countries, which could solve the problem very simply by a change in accounting rules. Total financial collapse, once a problem only for developing countries, has now become a reality for Europe. The IMF is currently imposing it’s ‘austerity measures’ on the fringes of the EU, with Greece, Iceland and Latvia currently being the hardest hit. Dozens of countries worldwide have defaulted on their debts in recent decades, the most recent being Dubai, which declared a debt moratorium 3 weeks ago. If the once lavishly-rich Arab emirates can default, more desperate countries can; and when the alternative is to destroy the local economy, it is hard to argue that they shouldn’t. That is particularly true when the creditors are largely responsible for the debtor’s troubles, and there are good grounds for arguing the debts are not owed. Greece’s troubles, as in Ireland, originated when low interest rates that were inappropriate for Greece were maintained to support the cost of German reunification (which end up being far more costly than originally planned). Iceland, Latvia, Greece and Ireland have been saddled with responsibility for private obligations to which they were not parties. Greece may be the first in the EU fringes to revolt. According to Ambrose Evans-Pritchard in Sunday’s Daily Telegraph, “Greece has become the first country on the distressed fringes of Europe’s monetary union to defy Brussels and reject the Dark Age leech-cure of wage deflation.” http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/6804156/Greece-defies-Europe-as-EMU-crisis-turns-deadly-serious.html Prime Minister George Papandreou said on Friday: “Salaried workers will not pay for this situation: we will not proceed with wage freezes or cuts. We did not come to power to tear down the social state.” Notes Evans-Pritchard: “Mr Papandreou has good reason to throw the gauntlet at Europe’s feet. Greece is being told to adopt an IMF-style austerity package, without the devaluation so central to IMF plans. The prescription is ruinous and patently self-defeating.” The Euro currency cannot be devalued, that means that while the country’s ability to repay is being crippled by austerity measures, there is no way to lower the cost of the debt. Evans-Pritchard concludes: “The deeper truth that few in Euroland are willing to discuss is that EMU is inherently dysfunctional – for Greece, for Germany, for everybody.” As a condition of membership, Iceland is being required to endorse an agreement in which it would reimburse Dutch and British depositors who lost money in the collapse of IceSave, an offshore division of Iceland’s leading private bank. Eva Joly, a Norwegian-French magistrate hired to investigate the Icelandic bank collapse, calls it blackmail. She warns that succumbing to the EU’s demands will drain Iceland of its resources and its people, who are being forced to emigrate to find work. But the people are not submitting quietly to all this. In Latvia last week, while the Parliament debated what to do about the nation’s debt, thousands of demonstrating students and teachers filled the streets, protesting the closing of a hundred schools and reductions in teacher salaries of up to 60%. Demonstrators held signs saying, “They have sold their souls to the devil” and “We are against poverty.” In the Iceland Parliament, the IceSave debate had been going on for over two weeks and a growing portion of the population opposes underwriting a debt they believe the government does not owe. On December 3rd Mary Ellen Synon wrote in the Mail; http://synonblog.dailymail.co.uk/2009/12/what-iceland-can-teach-the-tories.html … that ever since the Icelandic economy collapsed last year, “the empire builders of Brussels have been confident that the bankrupt and frightened Icelanders must finally be ready to exchange their independence for the ‘stability’ of EU membership.” But last month, an opinion poll showed that 54 percent of all Icelanders oppose membership, with just 29 percent in favor. Synon wrote: “The Icelanders may have been scared out of their wits last year, but they are now climbing out from under the ruins of their prosperity and have decided that the most valuable thing they have left is their independence. They are not willing to trade it, not even for the possibility of a bail-out by the European Central Bank.” It’s time to seriously reconsider where we are going with NAMA and a few other issues. It’s looking like this issue of EMU is going to be ‘front and centre’ after the holidays. http://online.wsj.com/article/SB126114614130597139.html @Cormac, I find it interesting that you exhort the Irish to take responsibilitiy for our own actions and recognise our own shortcomings. Yet in your writings, I never see much attribution of blame or responsibility to the conduct of fiscal policy from 2002-07. You correctly ascribe to casuses of the Irish bust to the decision to join the Euro, you draw attention to the systems failure in the administrative system, particularly in financial regualtion. Yet you seem to dismiss out of hand the the notion that a more restictive fiscal policy could have ameliorated the current recession. In short, the Irish are to blame for the current situation, excepting of course those 15 individuals in the Cabinet. @Joe You wrote “Yet you seem to dismiss out of hand the the notion that a more restictive fiscal policy could have ameliorated the current recession.” Can you name me anyone serious at the time who suggested a restrictive fiscal policy that would have made enough of a difference? Can you identify anyone who offers a credible methodology of measuring the fiscal policy restriction needed to counterbalance a relaxed monetary policy? And just how, in political terms, would a government be supposed to sell such a restrictive fiscal policy? Fine Gael’s 2002 spending plans would have seen greater spending than the plans eventually implemented by the FF/PD government. Being wise after the event or wishing away difficult political problems before the event does not constitute a credible policy, however academically appealing. @Cormac Your attitude reminds me of Homer Simpson’s advice to Bart..”Son if a thing is too hard, give up”. The tragedy is there was a cosy consensus in Ireland to run a mixture of loose fiscal and monetary policy from 2002-07. As a result of that double mistake, we are where we are and we have to deal with the consequences of these mistakes. All I am asking is a little recognition that the profligate growth of public spending from 2002-07 contributed to our woes. Ascribing everthing to the decision to join the euros is a partial explanation. As to Labour, FG or SF spending plans during that time, it matters little. FF and the PDs were in power, got the salaries and the mercs and perks so to my mind are accountable for the mess. @Joe Your point about political responsibility is well made. But there are wider points about economic responsibility that are wholly open: 1. we lack an agreed view of what happened that could help inform a view of what should happen. 2. we lack an agreed view of the institutional structures that may be needed going forward. Instead we just have a shallow, politically convenient consensus that FF, greedy bankers, incompetent regulators and gouger auctioneers are to blame. If Robert Ludlum was to write a spy thrillerr on the subject he might call it “The Latchikoo Complex”. But that consensus is – IMHO – largely wrong and if dominates official thinking it risks replicating the errors of the past, albeit in a somewhat different form. @Cormac Agreed on 1, which is why Dr Honohan’s proposal for an inquiry would help/ Moreover, it should be an all party Oireachtas enquiry along the lines of Jim Mitchell’s DIRT inquiry not some Tribunal led by a HC judge and a coven of preening SCs. Better to have a committee of the Great and the Good with such as Micheal Noonan, Ruairi Quinn, Shane Ross, Feargal Quinn, Sean Ardagh, Sean Fleming etc. if 1 is done properly 2 might follow. We need to move beyond the pantomine “look behind you phase”. @Cormac “Can you name me anyone serious at the time who suggested a restrictive fiscal policy that would have made enough of a difference?” I’m *very* serious… There were certainly some folks in, what’s it called?, oh yeah, You-rope who were talking about some structural defect in the deficit. Government spending was 40% of the boom (in GNP terms – I think it is valid to use GNP when talking about spending… even if you think GDP should be used for potential income; the point being that of the money that was actually spent in the domestically traded economy, government accounted for 40% of it). There was a certain Mr. McCreevy who wanted to put a brake on housing speculation too. Sometime in 2002, was it? Unfortunately, he was over-ruled… Maybe I’m not that serious… Cormac But …. What if we had run the economy within the disciplines -not only the macroeconomic disciplines- required by membership of the Euro. We would now be in some difficulty but not in calamity. If we had applied property taxes, did not remove large numbers of people from liability for income tax, maintained more reasonable rates of CGT and in particular kept the 60%CGT for gains from development land, not to mention enforcing more rigorous control on the banks, things would be very different, to say the least. Entering EMU was a political decision accompanied by great risks for the reasons you identify. As a sovereign nation we made that choice but we also chose our economic and regulatory policies subsequently. If we chose differently and more wisely things would now be better. Maybe not great, but certainly better. The reality is that if we had stayed out of EMU and pursued unsuitable economic policies, our currency would have been constantly under threat and there would have been instability which would have prejudiced economic and social development. The main point is that if a country pursues unsuitable economics for ideological reasons there will be bad outcomes, in or out of a currency union. Is it not folly to have driven the economy with a particular ideology when the economic and political contexts required a wiser more pragmatic approach. @ Zeno You wrote “The main point is that if a country pursues unsuitable economics for ideological reasons there will be bad outcomes, in or out of a currency union.” I largely disagree. There is no doubt that unsuitable policies will produce unsuitable outcomes. And there is no doubt that mistakes were made here in economic management over the last decade. But the similarity of economic outcomes for EMU members Ireland, Spain and Greece indicates a systemic problem of European dimensions rather than a uniquely Irish problem. If we had stayed outside EMU the economic thermostat of our currency would have been left on and it would have prompted timely policy adjustment. As it was, we joined EMU and turned it off. As a result, we now have a decade of enormous economic imbalances to work off. Conclusions 1. We should probably not have joined EMU. 2. We are probably stuck inside EMU now. 3. In framing policy recommendations, economists should consider applying a Taylor Rule analysis to see what EMU interest rates will give us in the coming years. I tried to do that here: http://www.irishtimes.com/newspaper/opinion/2009/0815/1224252584157.html Comments are closed.