Euro is to blame for our economic ills. Should we restore Irish pound?

THE euro is one of the main causes of our current economic problems and has been for some years now.

Our involvement as one of the 15 member states of the Economic and Monetary Union (EMU) contributed dramatically to the property bubble that has now burst and is the leading cause of the sudden domestic downturn.

Our euro membership sees us suffer from excessively high interest rates and a currency valuation against the dollar and sterling that will damage many exporters just when we need to be stronger to cope with the international downturn.

Yet it is one of the unchallenged tenets of Irish political life that EMU membership and the euro are good for us. Now that a global economic storm threatens to swamp us, it’s time to question that assumption. The contention that the euro is good for us is as much emotional and political as it is supported by hard economic facts.

We were fed lots of lies to persuade us to buy into EMU membership, including the notion that surrendering a key part of sovereignty was not of great concern. We had two main levers of economic control — self-determination of fiscal and monetary policy — since the break of the parity link of our pound to sterling in 1979.

We still have the first — determined by the Government through the budget each year — but we were persuaded to surrender the second by giving up our currency and control of interest rates.

We were told this didn’t matter because our pound (remember it?) was not truly independent anyway. This was not quite true. It traded within a band in the old exchange rate mechanism and it was possible to move our interest rates somewhat from European levels as and when it suited us.

We were also able to devalue our currency by 10% in early 1993 during the last big financial crisis to hit this country, at a time when interest rates soared to penal levels. It was crucial to the later economic success of the country.

Yet we gave this up because we were promised “permanently lower interest rates” if we joined the euro. It was nonsense because interest rates should be set to meet economic necessities of the day and being low is not necessarily always good.

Since the euro came into creation, the European Central Bank (ECB) has set the price of borrowed money to suit the economies of continental Europe, not little Ireland, even when its economy is out of kilter with the rest of the EMU members. The rate set was far too cheap and caused a lending boom by greedy bankers.

As our economy boomed and asset prices — particularly for property — soared, an independent Dublin-based Central Bank would have acted to make the cost of borrowed money more expensive. It couldn’t act because it no longer had the power.

The boom was allowed to get out of hand as a result of ECB inaction, despite a number of cautionary statements by the Central Bank, some economists and some media commentators. Their analysis that this would all go wrong eventually was right and now they are victims of vicious sniping about being allegedly unpatriotic in talking us into a recession.

Most of this guff is coming from vested interests who were the main financial beneficiaries of the boom but who haven’t prepared themselves properly for when it would all end.

They are also the people who persuaded everyone that the boom would never end: banks who lent excessively, estate agents who promised continued asset price growth and the Government who liked all the tax revenues and the political benefit of the feelgood factor.

Now the debris created by the bubble bursting is all around us. The Irish stock market has fallen by about 40%, mainly because it is stuffed with banking and property-related stocks. The Irish property market has fallen probably by about 25% bringing valuations to a more realistic level. This may be enough to put a proper price on things, but unfortunately such is sentiment at present that I wouldn’t bet on it.

What we need now is an interest rate cut from the ECB, but it is unlikely to be forthcoming. This failure is having a double-whammy effect. Money is more expensive than it needs to be in Ireland. Many mortgage-holders are worried about the size of repayments on assets that have fallen in value, especially those who borrowed at or near the peak. Their consumer spending is going to fall as a result, depressing retail sales and many other forms of domestic economic activity.

Many Irish people used the “equity” in their homes to finance property investments, both at home and abroad. Irish people will find it hard to get buyers for apartments in Bulgaria, Croatia and other far-flung places.

One in six units in Ireland may be empty, meaning many landlords are getting no rent. Others can barely cover their mortgages on these properties. Those on interest-only loans are suddenly fearful of how they will be able to sell the property in the future at a profit to cover the repayment of the purchase price to the bank.

This means the assumption that the construction sector will build 45,000 new units this year may be heroic. If buildings are started, they may have the roofs put on but they will not be offered for sale until the overhang of empty properties is sold.

The amount of new starts this year may be very, very low and construction-related layoffs will lead to reduced spending.

The Government’s property-related tax revenues, to which it has become fixated like a junkie, are going to come in seriously below budget, putting on pressure either to raise taxes (which would be wrong), cut back on capital spending (also wrong) or, if current spending increases cannot be moderated (which they should be), borrow like crazy. It should.

AND the hope of vested interests is that some manufacturing and services, particularly of exports, would pick up any slack created by a construction slowdown. This, too, may be wishful thinking. Again this is partly the fault of the euro. It is overvalued against the dollar and sterling, especially as the ECB is refusing to cut rates at a time when the dollar’s value has been cut by the 0.75% emergency rate increase. Sterling has fallen by more than 10% in value against the euro in recent months… the damage to our exporters is obvious.

The true worth of the euro to us as an economy is not something we question because few people think it would be possible to withdraw from the common currency by leaving the EMU and returning to our own independent currency.

While it would be hard in practice to achieve, it is possible — although you can imagine how the doom-mongers would scream that to leave the euro would be disastrous for the prestige and reputation of the economy and to our place in Europe.

We must hope that the ECB (which says it won’t cut rates while inflation remains above 2% across Europe) decides to cut them, and soon. European economic growth rates are expected to be so low this year that any unexpected negative developments could tip the union as a whole towards recession. This is not good for exports, but given that we depend more on Britain and the US, whatever delivers interest rate decreases would be better for us.

The Last Word with Matt Cooper is broadcast on 100-102 Today FM, Monday to Friday, 4.30pm to 7pm.