IN recent years, there has been some academic discussion on whether Ireland should leave the euro and re-establish its own currency.
A small number of advocates of a euro exit have made the choice sound as simple as flipping a coin. The reality, however, is far more complex, and the risks very real.
The argument presented for an exit is that defaulting on our debts and establishing an independent, devalued currency would somehow give international financial markets confidence to invest in Ireland and make us more competitive in terms of international trade.
The truth, however, is that a unilateral exit from the euro would likely trigger an unprecedented economic and financial crisis, which would have enormous, damaging implications for jobs, investment, and living standards.
In the first instance, the banking system would be cut off from the funding and support of the ECB. It is this support that has kept the domestic banking system intact in recent years. Without it, capital would flee the country, the security of deposits would be jeopardised, and the entire system could collapse. It is a vista not worth contemplating.
A euro exit would likely result in suspension of the bailout programme and the financial security that being a member of the eurozone provides into the future. Following an exit, Irish debt would still be largely denominated in euros, a new weaker independent currency would increase the cost of debt further; this, in turn, would likely lead to default and the economic repercussions and unwanted global publicity that such a move would involve.
Simply reneging on debts would shut us out of capital markets and attach an unnecessary premium to our future borrowings. It would demand the immediate closure of our deficit and, as a result, prompt additional, rapid, and dramatic cuts to public expenditure in areas such as health and education. A devalued currency would push up the cost of imported goods, with inflation rising as a result.
Ireland’s size means that any exit scenario would also involve pegging the new currency to another established currency. As we experienced prior to joining the euro, the currencies of smaller countries are more susceptible to speculation and market volatility than a currency union. Such scenarios are undesirable in terms of retaining or attracting investment.
The economic adjustment and the restoration of competitiveness within the eurozone over recent years has undoubtedly been very difficult for Ireland, but there is no easy alternative.
Iceland is often held up as a model Ireland could follow, but predictions of a pain-free Icelandic recovery have proven wide of the mark. Iceland’s economy remains in the doldrums, standards of living have dropped dramatically, and the crisis is far from over. Their predicament provides no simple lessons for us as to how we could have managed the crisis differently outside of the euro.
Aside from the risks of a euro exit, the case for membership remains compelling. The simple fact remains that exporting to other countries is easier if they have the same currency.
Ireland exported €54bn worth of goods to other EU countries in 2012, of which €36bn, or 65%, was to eurozone members. This compares with 20% to the US and 15% to Britain.
Although companies do work in other currencies, monetary union has increased transparency in cross-border transactions and reduced costs and risks associated with currency exchange for business.
Not only has euro membership benefited Irish exports to Europe and globally, it has made Ireland a more attractive location for inward investment and a successful platform for companies to service their European operations.
Ireland and Irish business has a lot to lose from a euro exit. Yes, the eurozone has experienced unprecedented pressures in recent years and hard lessons need to be learnt about how to better manage economies in a monetary union. Leaving the euro is not, however, the answer to our economic problems.
Despite the weaknesses and design flaws that the global economic crisis has undoubtedly exposed in the euro over the last five years, we’ve seen a significant response from the political establishment to improve economic governance rules and ensure the euro remains intact. The eurozone and the European institutions have, if belatedly, demonstrated their resolve to ensure that no question mark remains over the future success of the single currency.
Despite the crisis, Irish businesses have responded and Ireland has returned to comparatively solid, if low growth. It has been a difficult journey and the road ahead is challenging. Stubbornly high unemployment and weak demand are common problems across the EU. The challenge now must be to move rapidly from stabilisation of the euro and the European econ-omy to growth and job creation.
Given the current relative stability in the eurozone, would it be a good idea to risk a new economic crisis, further disruption to our fragile banking system, and an unnecessary flight of capital, by leaving the euro? From a business perspective, the answer is an emphatic no.
Ireland is on a difficult but sustainable path to economic recovery; we must stay the course.
* Erik O’Donovan is head of Ibec Europe.
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