I was asked by an Irish Times journalist recently if anyone had written up a review of the Irish debate on joining the single currency. This paper of mine from 1997 came close, though it doesn’t for the most part name or ascribe positions to the participants. Rereading it now though, it strikes me that a lot of it remains relevant.
The Bayoumi and Eichengreen material makes clear that central control of national fiscal deficits across the eurozone – the suggestion du jour – will not remove the vulnerability of Ireland and the Mediterranean economies to asymmetric (country-specific) shocks. This is what I was referring to in my post of a few months ago entitled: Jean-Claude Trichet, 2004: ‘no design flaw in the euro project’.
Colm McCarthy and I agreed recently that the Irish debates (in which both of us were anti) did not identify the precise fault lines that would ultimately emerge. Centralised eurozone banking regulation and resolution regimes – the absence of which we all now recognise as design flaws – will not address the problem of asymmetries however.
The article makes the point that “those worried about the rigidity of the single currency system argue instead for policy co-ordination alongside floating rates. In that way the destabilising element associated with ‘maverick’ macro policies would be removed but the exchange rate would still be free to adjust to counter country-specific shocks.”
Alternatively, within the single currency, “fiscal federalism” could go some way towards correcting the problem. The Federal Budget absorbs about one-third of the average region-specific shock in the US; the figure for Canada is around one-fifth. We have nothing similar in Europe. But think of the pork-barrel politics this would (will?) entail.
And have a wry smile at footnote 11, which I had forgotten about, concerning an aspect of the debate between Patrick Honohan on the one hand and Peter Neary and Rodney Thom on the other. (The ‘foreign currency’ refers to the euro). How times can change!