Should we be funding Irelands black hole? Thats the question being posed over on the Birmingham Post’s business blog. In principle the answer should be a firm no while it remains a member of the Eurozone. However, in reality we may have little choice but to do so.
Following the general election, while Gordon Brown was still squatting in Downing Street, Alistair Darling scuttled off to an EU summit to discuss Europe’s financial crisis. While he was there and in full knowledge that it was highly unlikely having just lost the election he would ever be held accountable for his actions, he agreed to make the UK liable for part of any Eurozone bailout package. On the face of it this might not seem that unreasonable. After all, Ireland is one of our biggest trading partners; our own banks and businesses have invested heavily in Ireland, we have a shared history, we couldn’t let the country go to the dogs. Quite right. However, extending Ireland a loan while it still remains a member of the Euro, and crucially, still has no control over its interest rates is foolish. For years economists were warning that Ireland’s boom was out of control, that interest rates needed to rise to control its excessive policy of cheap money. But as a member of the Euro it has no control what so ever over its interest rates, they are set by the ECB in Frankfurt. As a result a credit bubble grew, burst and pushed the country to the edge of national bankruptcy.
When the Euro was launched, it was a big bet that sharing the same currency would make a Ireland’s economy converge with other continental economies, and so allow the European Central Bank to operate a single monetary policy for all of them. It hasn’t worked, the economies have proved to be too different, they diverge cyclically and structurally from one another. As a result the central interest rates are wrong just about everywhere. This has expressed itself differently across Europe. In Ireland it led to a banking collapse. In Spain, a construction bubble that burst. In Germany, a massive trade surplus and so on.
The best option for Ireland would be to leave the Euro in its current form. This would allow for a currency revaluation that would end the trade stasis that the euro has locked Ireland into, with artificially high prices depressing Irish exports. It would crucially allow their Central Bank to regain its powers over interest rates. Of course, leaving is not without its risks. Given the weakness of the Irish economy, the Irish pound as a small currency could suffer a massive drop in value.
The other option would be the Eurocrat’s at the ECB to realise that the Euro needs to be split up into more manageable currency areas with varying interest rates. That of course is not likely to happen as it does not suit the European project politically. And it for this reason that we do our up-most to avoid contributing to a Eurozone bailout package. All we would be doing is sticking a plaster on a wound that will keep reopening. It is the single currency that is at the root of the crisis, and the crisis won’t stop with Ireland.