All-island economy could boost prosperity

Last year's film Man About Dog followed three young men on a journey through an underworld of crime and hare coursing

Last year's film Man About Dog followed three young men on a journey through an underworld of crime and hare coursing. One of the film's more memorable scenes takes place in a betting shop, writes Marc Coleman.

The likely lads - who come from nationalist Belfast - are placing a bet with the local bookie. But they are paying in a highly unusual currency; sterling notes on which the head of Queen Elizabeth has been replaced by Gerry Adams. The film here makes the following point: in some parts of the world currency is not just a means of payment, but a link to political and national identity.

Fortunately, this is not true everywhere. As a former economist of the European Central Bank, I was fortunate to participate in a project, EMU, in which 12 sovereign nations agreed to break this link for ever. Could the people of Northern Ireland be convinced to regard currency as a practical commercial tool and not a badge of identity? If so could, and should, Northern Ireland join the euro?

The political normalisation of the North, begun by last month's IRA statement, must go hand-in-hand with economic normalisation. The large subvention from mainland Britain will not continue indefinitely, at least not if Gordon Brown has his way. Even if Britain was happy to continue the drip feed, the economic position in Northern Ireland should be no cause of satisfaction to either unionists or nationalists.

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For a start it conflicts with nationalist values of independence from Britain. But it is also hardly in tandem with the values of self-reliance, economic success and commercial viability, values of which unionists were once proud.

The challenges to the North's development as an economy are several. First, the small size of the Northern market for goods and services prohibits the growth of companies.

There are very few public limited companies in Northern Ireland, and most businesses are small or medium-sized. Energy costs are high, as there are relatively few customers over which the high fixed costs of energy generation can be spread (a problem the Republic shares).

And the public sector is everywhere dominant in the Northern economy, attracting talent that might otherwise work in the private sector. The lack of a strong and vibrant private sector is forcing a devastating brain drain. In an echo of the Republic during the 1950s, the North's brightest and best are forced either to emigrate or to take up careers in law, medicine or the public service.

According to a recent survey of the economy by Price Waterhouse Coopers, a lack of skilled labour is cited by Northern business as the third-biggest factor in generating international sales. The second-biggest relates to price competition.

Interestingly, the largest factor cited by businesses participating in that survey was the problem of exchange-rate and currency volatility. As well as the problem faced by local businesses trying to sell to euro zone markets, being outside the euro area gives the North a relative disadvantage in attracting foreign direct investment.

Euro membership would make Northern Ireland a more attractive base for foreign investment. Northern Ireland's low cost of living would become a significant advantage to multinationals wishing to locate within the euro zone. Euro membership would also help to fuse together the economies of North and South, creating a larger market for goods and services.

An all-island market for utilities (electricity, gas, water) and transport infrastructure would also be likely to create efficiencies of scale. Northern Ireland would also benefit from lower interest rates than prevail elsewhere in Britain, as well as from any benefits that could accrue if it entered the euro zone at a competitive exchange rate.

Disadvantages of euro membership also exist, as do technical challenges. Mainland Britain remains an important trading partner for the North. On the other hand, the euro zone is a much larger market than Britain. And the experience of the Republic has shown that there is not necessarily a conflict between euro membership and a growing trading relationship with Britain.

As a separate political entity to the Republic, Northern Ireland would need its own monetary authority in order to enter the euro. That authority would need to collaborate closely with our own Central Bank. There is a precedent for this: Belgium and Luxembourg maintained such an arrangement for many years before either country joined EMU.

Another question relates to fiscal authority. Devolution, when it comes, will give the North greater control over public expenditure. But although many in the North envy our low rates of corporation tax, present constitutional arrangements prevent any harmonisation of tax and regulatory regimes between North and South.

But the levers of tax and regulatory policy may be critical to any solution of the North's economic problems. Even if differences cannot be eliminated here, they could be minimised. The Isle of Man, for instance, retains the queen as head of state, but has a different tax regime compared to mainland Britain.

Realistically, any case for Northern Ireland to enter the euro must recognise important cultural sensitivities. It would necessarily involve putting the queen's head on euro coins, if only to overcome any unionist fears of a subtle papist plot.

And for it to be a stable arrangement, it would have to go hand-in-hand with an overall settlement in which the political identity of the North was resolved.

But in the final analysis, a currency is a practical economic device, not a badge of identity. The prospect of creating an all-island economy should be seen separately from the question of the North's political identity vis-à-vis Britain. The euro has shown that economic collaboration can occur without political union. Prosperity is in everyone's interests.

The case for Northern Ireland to join the euro is not fully proven. But unionists and nationalists should be mature enough to give this debate a fair hearing. After all, the European ideal was first proposed by Monnet and Schuman to advance the cause of peace in Europe.