When euro membership was in prospect, the Central Bank advised caution on two major grounds: interest rate policy and the British decision to keep sterling. Readers will recall that at that time Eurozone interest rates were substantially lower than Irish rates and set to decrease further.
The Central Bank feared this would provoke an inflationary credit boom and indeed that higher rates, not lower, would be needed to stabilise the strengthening economy.
Part of the reasoning was that Ireland was (and is) far more sensitive to interest rates than continental Europe owing to its demographics and especially its credit structure which is (like Britain’s) based principally on variable rate loans. The Bank of England made similar calculations and — demographics apart — advised the British government against euro entry.
Needless to say, the Irish Government seized short-term popularity via euro entry, low interest rates, a credit boom and the consequent surge in house and land prices which have made most of the electorate feel much wealthier.
We are now seeing the fruits of the policy. Ireland’s key economic relations are with Britain and the US, yet we have adopted the currency — the euro — of industrialised continental Europe with which we have little in common either in economic structure or trading patterns. As the euro has strengthened, the competitiveness of Irish industry and agriculture has declined, manufacturing decimated and inward investment halted.
In its place the economy has levitated on a construction boom.
The last few years since euro entry have seen credit growth routinely around 25% per annum and uncomfortable inflation. Meanwhile the euro has soared from about $0.82 to $1.57 today and, more recently, gained 15% against sterling.
In prior times, the Central Bank would long ago have managed interest and exchange rates to avoid such damaging currency movements which threaten to devastate the Irish economy.
To put this more starkly: the latest data shows the average US industrial wage is $17.80/hour (€11.50) and $599/week (€389).
The latest CSO figures for Irish industrial earnings for June 2007 record 15.66/hour; and an average public sector wage of 918 for September ’07.
These kinds of disparities indicate a massive readjustment in the Irish economy is in prospect, originating in a fatal euro entry decision.