Time to debate the full cost of the single currency

LATER this month, a report from the Economic and Social Research Institute may finally stir up a debate in Ireland about the single currency, which has become something of a holy grail for Irish policy makers. So far, the only heated argument has surrounded the implications for Ireland if, as appears likely, sterling is not one of the founding members of a monetary union. But a much wider analysis is needed of the issues surrounding Ireland's goal of participating in monetary union.

In a speech to Dublin Chamber of Commerce this week, UCD economist, Prof Brendan Walsh, gave an analysis of the single currency which concluded that we need to be sceptical about the benefits and alert to the risks involved. In particular, he pointed to the need for the building in of much greater flexibility in any new national wage agreement to allow the economy to cope with the strains of monetary union without shedding jobs.

The first thing to realise about monetary union is that we are legally committed to it. By signing up to the Maastricht Treaty, we undertook to join by January 1st, 1999, at the latest, provided we meet the qualification criteria. Britain can opt out, even if it qualifies.

The potential benefits of the single currency arc continually highlighted. Interest rates should fall and the cost of currency transactions with the other member states will disappear. But, as Prof Walsh warned.

"There is no free lunch." There is also a cost in giving up use of the exchange rate as an instrument of policy.

Over short periods of time, the exchange rate can vary to take into account the impact of "shocks" which affect one country in a different way to another. In Ireland, for example, the pound has traditionally fallen on tandem with sterling, and weakness of the British currency precipitated devaluations in both 1987 and 1993.

This flexibility would not exist in a single currency area and, as Prof Walsh puts it, it is clear that there will be "no bail outs, no special funds, no further help from Brussels or Frankfurt or even from national budgets, constrained as they will be by the proposed EMU stability pact".

Over longer time periods, the exchange rate has also adjusted to take account of changes in competitiveness and the level of economic development.

So, membership of a single currency area would pose two separate economic challenges.

The exchange rate could no longer adjust to take accounts of events such as a fall in the value of sterling, and if the exchange rate cannot adjust something else will have to. Either new forms of flexibility will have to be built into the economy, and specifically into wage and salary levels, or job losses will result from adverse shocks such as a sterling fall.

As things now stand, there will be no large centralised EU budget transferring funds automatically to states adversely effected by economic shocks.

The existence of such a budget which generally accompanies political union and the ability of labour and capital to move freely within the monetary unions are seen by economists are prerequisites to a monetary union. The EU does not fully meet the mobility criteria and fails the budget test.

The second challenge would be the long term one of "keeping up with the Schmidts", or maintaining competitiveness with the core members of the monetary union. The economy has certainly become much more competitive in recent years and, at a glance, productivity appears strong. However, a glance can be deceptive and a true measure of Ireland's economic productivity is difficult to find because of the impact of multi national industry.

So far, all the attention has been concentrated on whether we will qualify for monetary union and what Britain will do. If we are serious about going in, we must now look at what it will be like inside the single currency and start to plan accordingly.