Author: Frank Barry

The Irish Debate on the Single Currency

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!

Kevin O’Rourke on the eurozone crisis

Kevin O’Rourke delivered a hugely insightful talk on the crisis and the global situation at a conference in Dublin last week. His presentation is here.

Economic Foundations of Irish Foreign Policy

I was asked to write this chapter for a forthcoming RIA volume on Irish foreign policy. A summary:

A country’s foreign policy is largely driven by what it perceives to be in its economic interests. That this does not provide a complete picture is evidenced by the fact that Irish development assistance has never taken the form of tied aid. Nor can the influence of powerful vested interests be discounted. A case can be made that Ireland turned protectionist again once membership of the European Union had been achieved. Agricultural and sheltered-sector interests have sought to stymie the liberalisation efforts of the WTO and the European Commission respectively. A further complicating factor is that a society’s own economic interests can occasionally be miscalculated. Joseph Lee has noted that “while the ‘political’ skills of Irish representatives in negotiating positions are widely acknowledged… there seems to be no comparable criterion for assessing the calibre of conceptualisation of the Irish case.” Irish foreign policy through the years has nevertheless recorded many successes in defending the economic interests of the citizens of the state.

The paper considers the political and economic determinants of Irish trade policy, the evolution of its inward foreign direct investment strategy, and the country’s position on international migration and on the broadening and deepening of European integration. A separate case study focuses on how successive governments have sought to defend and exploit the advantages of Ireland’s low corporation-tax regime in international negotiations.

Jean-Claude Trichet, 2004: “no design flaw in the euro project”

I mentioned on this site before how a number of academic economists, during the debate on whether Ireland should adopt the euro, referred to a design flaw that had been well recognised by US economists: the lack of a federal budget.

It was known that the Irish business cycle was out of sync with the eurozone core and that the timing of ECB interest rate changes would not be appropriate for Irish conditions. A large part of such asymmetries (or ‘region-specific shocks’) are offset in the US at the federal level: a $1 decline in US regional income relative to the national average induces a fall of around 25 cents in federal tax liabilities and an increase in inward transfers of about 10 cents.

Karl Whelan’s recent proposal re Irish bank debt was to federalise it. Morgan’s was similar to one I advocated recently on this site: monetize it. Both entail responsibility being shared at the federal (i.e. European) level.

Paul de Grauwe warned, as far back as 1999, that the “failure (to create a European government with similar responsibilities to present national ones) creates the risk of the break-up of the monetary union”.

I have just now stumbled on a speech made by ECB President Jean-Claude Trichet in Dublin in May 2004 which rejected claims of such a design flaw, as follows: “Moving to the second topic of my speech, i.e. fiscal policies, let me stress that we Europeans have been very bold in creating a single currency in the absence of a political federation, a federal government and a federal budget at the euro area level. Some observers were indeed arguing that without a federal budget of some significance the policy mix would be very erratic, depending on the random behaviour of the different national fiscal policies of the member countries. They were also arguing that without a federal budget it would be impossible to weather, with the help of the fiscal channel, asymmetric shocks hitting one particular member economy. In this respect, the very existence of the Stability and Growth Pact actually allows (us) to refute these two arguments: first, the Maastricht Treaty and the Pact provide a mutual surveillance by the “peers”- i.e. the Ministers of Finance – of national fiscal policies; second, by calling upon Member States to maintain their budget close to balance or in surplus over the medium term, the Pact allows the automatic stabilisers to play in full in countries facing an economic downturn, without breaching the 3 % ceiling for the deficit.”

The full text of Trichet’s speech is here.

Common Consolidated Corporate Tax Base: a critique

I presented this paper on CCCTB to the Kenmare economics conference back in 2008. Many in attendance felt that it was unlikely to come to pass. It is clearly on the agenda now though it is not yet certain that it will meet the requirements associated with “enhanced co-operation” (which, under Lisbon, requires nine countries rather than the eight mentioned in the paper, which was correct at the time. Nothing else, as far as I can see, needs updating).

I characterise the proposals as a “Trojan horse”. The logic is similar to that of Bettendorf et al., writing on “Corporate Tax Harmonization in the EU” in the journal Economic Policy in 2010. They say “consolidation with formula apportionment does not weaken incentives for tax competition. Tax competition instead offers a rationale for rate harmonization, in addition to base harmonization.”