A retrospective look at the debate around joining the euro

[Brendan Burgess]

A very interesting talk coming up. Frank Barry is a very engaging speaker. And it's a useful exercise to look at how we discussed important decisions.

Brendan

www.ssisi.ie


THE STATISTICAL AND SOCIAL INQUIRY SOCIETY OF IRELAND


The Irish Single-Currency Debate of the 1990s in Retrospect


by Frank Barry (TCD)


to be delivered on

Thursday, 23rd February 2017 at 5:30 pm

at the

Royal Irish Academy, 19 Dawson Street, Dublin 2



Discussants: Patrick Honohan and Colm McCarthy






Abstract: Ireland was one of the initial EU member states to move to currency union as of January 1st 1999. The single-currency project, and Ireland’s participation in it, had been vigorously debated within the Irish economics community in the 1990s. The paper reviews this debate with three particular questions in mind. To what extent was it recognised that membership might increase Ireland’s vulnerability to external shocks? Would membership inhibit or facilitate an appropriate response, and were the implications of membership for the appropriate conduct of economic policy correctly identified? The paper also briefly reviews current thinking on necessary reforms to eurozone structures. It ends by considering the counter-factual – what exchange rate regime would Ireland have adopted if it had not joined the euro, and what might the consequences have been? – and offers a retrospective assessment of the debate that took place prior to membership.

 

[jjm]

If we had not Joined the Euro I suspect Wages/Costs would be lower there would be more pressure to follow UK out of the EU.

 

[T McGibney]

The single-currency project, and Ireland’s participation in it, had been vigorously debated within the Irish economics community in the 1990s.

Is this really true? I don't remember any significant debate. I do recall that there was pretty much universal agreement that the Euro was going to be great for us and any dissenters, in the usual Irish fashion, were dismissed as cranks.

 

[elacsaplau]

A very interesting talk coming up. Frank Barry is a very engaging speaker.

The single-currency project....had been vigorously debated within the Irish economics community in the 1990s.

Thanks Brendan - I fully agree and will try make it.

TMcGibney- serious questions - are you a member of the Irish economics community? If you are, were you in Ireland in the 1990s?

 

[odyssey06]

I wasn't a member of the Irish economics community, then or later, it would be interesting if the discussion also considered "to what extent did the debate within the economics community influence the wider debate on joining the euro", or lack thereof... because I don't remember any vigorous debate about joining the euro in any general sense, or serious levels of opposition from Ireland's economic community.

 

[elacsaplau]

Odyssey06,

The abstract specifically refers to the debate within the Irish economics community. All I was doing was asking TMcGibney whether he was a member of this community because if he was, I believe that he wouldn't have made the comment he did. [The point being that the abstract is the premise of the discussion. It undermines the integrity of the discussion if the premise is undermined and I was keen to correct any false impressions that may have been created. My purpose, therefore, was to correct what I perceived was an error - no more, no less!]

I think the question you pose is interesting but separate. As it happens, I fully agree that the general extent and quality of debate prior to the Euro's introduction were poor at political (both within Ireland and the EU) and public levels.

 

[T McGibney]

TMcGibney- serious questions - are you a member of the Irish economics community? If you are, were you in Ireland in the 1990s?

No (but I've always had an interest in economics and have closely followed, and therefore have been generally aware of the issues discussed in the course of, all our major economic policy debates during the past 30-odd years - which indeed prompted my question and associated observation) and yes.

 

[T McGibney]

Odyssey06,

The abstract specifically refers to the debate within the Irish economics community. All I was doing was asking TMcGibney whether he was a member of this community because if he was, I believe that he wouldn't have made the comment he did. [The point being that the abstract is the premise of the discussion. It undermines the integrity of the discussion if the premise is undermined and I was keen to correct any false impressions that may have been created. My purpose, therefore, was to correct what I perceived was an error - no more, no less!]

I'll say what I like, thanks.

I most certainly did not create a false impression of anything. Another poster has in the meantime corroborated my observation. And you haven't made any effort to correct anything. All you've done is to question my capacity to comment.

I'll might start taking lectures from you when you are brave enough to put your name to your posts here.

 

[elacsaplau]

I most certainly did not create a false impression of anything.

Not true

Another poster has in the meantime corroborated my observation.

Not true

And you haven't made any effort to correct anything.

Not true

All you've done is to question my capacity to comment.

True

I'll might start taking lectures from you when you are brave enough to put your name to your posts here.

I'll take your word on this one

 

[cremeegg]

Not being a member of ireland's economic community (whatever they think that means, the economically active or hurlers on the ditch) I almost feel I have no right to comment, almost.

To what extent was it recognised that membership might increase Ireland’s vulnerability to external shocks?

It was generally recognised that joining the Euro would decrease vulnerability to external shocks as we would be part of a greater whole. It was recognised that the policy response would be dictated by the needs of the whole rather than any needs that might be peculiar to Ireland. It was suggested that the needs of the whole might end up as the needs of the powerful.

Would membership inhibit or facilitate an appropriate response,

A bit of a silly question. As interest rate setting powers were given up by the Irish Central bank that inhibited a response from that quarter to that extent at least. The ability to respond at Euro level for the block as a whole obviously facilitated the ability to respond at that level, while the ability to fine tune the response to the needs of individual countries was lost.

and were the implications of membership for the appropriate conduct of economic policy correctly identified?

They were by me, I don't know about the economic community. I realised that joining the Euro would cause a step change reduction in Irish interest rates and hence increase the value of property. I borrowed all around me to purchase property in the early 2000s as it was obvious that property prices could go only one way. That was my identification of the implications of membership for the conduct of my economic policy.

At a government level the I doubt the implications were well understood. However while the common view is no doubt that the government underestimated the negative consequences of the low interest rates and the threat to the banks. It should be pointed out that a significant portion of the entire Irish housing stock was constructed in the aftermath of joining the Euro financed by those low rates.

 

[Setanta12]

I'm with T.Gibney on this.

But can we revert to discussing the title of the thread. There's enough he sez/she sez in the media at the moment without creating another one here

 

[The Edge]

Propositions should be testable and verifiable.

Accordingly, it would be good to see some evidence that there was indeed vigorous debate on the issue within Ireland's economic community during the 1990s (similarly to T. Gibney, I don't recall much of it entering the public sphere, there may have been papers that were sceptical of the project discussed in academic circles - I don't know).

 

[The Edge]

A bit of a silly question. As interest rate setting powers were given up by the Irish Central bank that inhibited a response from that quarter to that extent at least. The ability to respond at Euro level for the block as a whole obviously facilitated the ability to respond at that level, while the ability to fine tune the response to the needs of individual countries was lost.

That isn't necessarily the case. It was open to the Central Bank to ameliorate the effects of low interest rates by means of, for example, requiring that the retail banks set tougher limits on mortgage applications and so on. For some reason, they tended not to use those powers, or if they did they didn't use them sufficiently to prevent a property bubble. All retro-active granted, but it would be interesting to examine why.

 

[Purple]

That isn't necessarily the case. It was open to the Central Bank to ameliorate the effects of low interest rates by means of, for example, requiring that the retail banks set tougher limits on mortgage applications and so on. For some reason, they tended not to use those powers, or if they did they didn't use them sufficiently to prevent a property bubble. All retro-active granted, but it would be interesting to examine why.

I've always been of the opinion that we should have introduced property tax when we joined the Euro and used them in the sane way we used to use interest rates to take the heat out of consumer led inflation.

 

[cremeegg]

Did anybody attend this talk?

 

[The Edge]

I've always been of the opinion that we should have introduced property tax when we joined the Euro and used them in the sane way we used to use interest rates to take the heat out of consumer led inflation.

If my recollection is correct, there was very little appetite for a property tax at the time, indeed there would have been screeching from the vested interests if any political party had attempted to introduce one.

There was in fact RPT (Residential Property Tax) during the years from 1989 approx to 1995 approx (from memory). It was at a lowish rate and only affected high valued properties.

Had a property tax been introduced, or more accurately re-introduced, at the time we joined the Euro, then yes, you are surely correct that it would have impacted on the property market, but we are talking in hindsight.

 

[Purple]

Had a property tax been introduced, or more accurately re-introduced, at the time we joined the Euro, then yes, you are surely correct that it would have impacted on the property market, but we are talking in hindsight.

That was my opinion at the time. We were losing one of the two main tools used to control inflation. We needed to replace it with something.

 

[jjm]

One of the things I can never ever understand to this day and the things that drives me mad when I hear people saying we had no way of control the Property market once we joined the Euro. We had control .It was and still called Stamp Duty.Other countries in the eu have used stamp duty to do just that.
Between joining the Euro and the property crash All of our main political parties were reckless and we should make sure they are reminded often. Election after election Fianna fail / Fine Geal / Labour and the progressive Democrats fought each other trying to out do each other on lowering stamp duty when the should be doing the exact opposite which I could see was reckless they knew it was reckless .Back when I got my last house loan around 1995 interest rates were around 16 % mostly to dampen down property prices It follows that by raising stamp duty you would achieve the exact same result so they did know and need reminding .It was possible to use stamp duty to drive out the people who were buying up houses before the were built and selling them on forcing up the price of houses on people .Stamp duty could have being used to put these houses into negitive Equity stopping the practice.We are paying a very heavy price for there reckless behavior wages and other welfare cost are away higher than they otherwise would be.No party going into government or trying to go into government after these Elections made control of property prices a Red Line Issue and again they all need to be reminded of that.

 

[odyssey06]

Did anyone raise the point that it was not a good idea to join such a structure without an exit plan should we realise down the line we needed to get out?

 

[cremeegg]

Thinking about this thread, it seems to me that the situation at present is not unlike the situation when Ireland joined the Euro. The Irish economy is growing strongly, interest rates for the Euro are lower than they would be for an Irish currency. We really are getting a second chance to get it right.

I wouldn't be as negative as many commentators about our performance last time round. We built a huge number of houses, we built schools and roads. We got some things wrong, we narrowed the tax base, we spent what was in effect one-off income expanding on-going commitments. We allowed the economy to become overly focussed on construction,

I've always been of the opinion that we should have introduced property tax when we joined the Euro and used them in the sane way we used to use interest rates to take the heat out of consumer led inflation.

Well we have a property tax now albeit small. We also have legislation damping house prices and rents. But we are not building enough houses.

It will be interesting to see if we do any better this time round. We should not become so obsessed with avoiding the mistakes of the past that we become afraid to make the best use of current opportunities.