EMU sceptics cling to outdated criteria

A running theme of recent discussion by Irish economists critical of Economic and Monetary Union is that its conception and design are "political". This puts it either beyond the ken of economic doctrine as they understand it or beyond their capacity to influence decisions in what appears to be a done deal. They lament the failure of Irish politicians to give good reasons why Ireland should enter a scheme so at variance with its own interests and so unlikely anyway to succeed.

For these scientists of self-interest it must indeed be perplexing that there is such a consensus across the main interest groups, most companies and many economists that EMU is good for Ireland and Europe. Are they thereby methodologically challenged? Or is the consensus based on a false consciousness and a misleading, politically orchestrated euphoria?

They adduce the following arguments against the project: that it leaves Ireland competitively vulnerable to a sharp sterling devaluation without the means to vary the Irish exchange rate; that it will lead to an inappropriate lowering of interest rates for the Irish economy; that it links us up with economies with which we do only one third of our trade; and that it does not accord with the conditions necessary for an optimum currency area. They conclude that euphoria arising from the recent rapid growth best explains the pro-EMU consensus, along with a generalised pro-Europeanism more emotional than rational, or - dread the thought - more nationalist than realist. A false consciousness, driven by bureaucratic, multinational and political interests, is suspected to be at work.

There is no escaping the suggestion that this could be a disastrous affair for the Irish economy. For a long time it was assumed by the critics that EMU was not only misconceived but also most unlikely to happen. Its timetable was driven politically, not by economic convergence of the participating economies. There was a street-wise assumption that the politicians would not be able to deliver on either in the face of public and market scepticism. When it became clear over the course of the last year that these assumptions did not hold, the critics have fallen back on the conclusion that EMU is a flawed economic project driven largely by political concerns. There is a strange myopic quality about this case. EMU is indeed a political as well as an economic project. It has been designed at the highest political level over the last 10 years of European integration, a debate which draws on a previous 20 years of discussion about building a single market within the EC/EU. In the period after 1989 it was, among other things, the price exacted by France and other European states for accepting German unification.

Its precise design as spelled out in the Maastricht Treaty and in subsequent negotiations owes much to the influence of neo-liberal ideas about budgetary balances, debt reduction and control of inflation, which normally would please economists from this school.

Thus there is more of the monetary than the economic in the existing design. This guarantees that EMU will evolve in years to come, probably taking in more on tax harmonisation and economic co-ordination, even reopening the debate on whether there ought to be fiscal mechanisms to protect its members against shocks.

These matters have been on the record, out in the open and continually addressed by political leaderships throughout the EU. They are central to the process of European integration, which does indeed bring together the political and the economic and should therefore merit continuing and close attention from economists.

There is no great barrier between the two domains, just as the barriers between national and European competences have been changing in response to broader changes in the international economy.

One sees in some of this criticism a belief that it is inappropriate to govern the economy or to construct institutions so to do. This is regarded as old thinking, assumed to have been discarded through the 1980s. But here it resurfaces at the international level, as if in defiance of established economic doctrine. There is more than a whiff of surprise that this should be so, of a lost intellectual hegemony by a group that became used during the 1980s not only to lecture the politicians but to hold sway over their policy approaches to economic affairs. The politicians eventually obliged with a drastic attack on overspending in the late 1980s and in the wider domain with a reluctant acceptance of neo-liberal constraints in the design of EMU. But this was accompanied by two further dimensions that found much less favour with these critics, social partnership and a commitment to deeper EU integration through the structural funds and the Maastricht Treaty.

The commitment to deeper integration confirmed the political and economic diversification that has been such a feature of Ireland's EU membership. It has dramatically reduced the Anglocentricity of Ireland's post-colonial history, working in tandem with a parallel process of Atlanticisation reflecting US investment and migration. Pooling of sovereignty within the EU has multiplied Irish influence; for small states, particularly those with big brothers (Denmark excepted), this is one of the most beneficial aspects of the EC/EU.

A strong political case for going into EMU in the first wave is, therefore, precisely to influence its design in the opening years. Ireland will be in the EuroX Council of member-states, in addition to the Ecofin, the importance of which is increasing as EMU approaches. It will be all the more important to be a member of the core group as growing prosperity and EU enlargement change Ireland's relative position, especially since we are not (yet?) fully in the other developing core areas of integration, security/defence and the Schengen system of free movement.

As has been observed by Alison Cottrell of the Paine-Webber economic commentators in London, this will include the capacity to influence the rate at which sterling itself enters EMU, assuming it does so somewhere in the period 2002-2006. Britain will be constrained in the use of competitive devaluation by a variety of obligations arising from the design of EMU, and by the Treaty of Amsterdam, which makes employment policy a matter of common concern among member-states.

It is characteristic of these critics that they should simultaneously assume Irish policy is driven by what the UK does and devote little or no attention to the direction in which that state's policy is likely to go in coming years. Since the most realistic assumption remains that Britain will join EMU, but belatedly, it is extraordinary that these critics have not examined the economic and market effects of Ireland reclassifying itself, effectively, surely, as a UK dependency, in the meantime. The alternative to EMU participation is economic reanglicisation, or at least a return to Anglocentricity. Why not spell out its costs as well as its benefits? Does the reluctance stem from an intriguing overlap between this case and that put forward by unionist spokesmen on optimal economic relations between Ireland and Britain as we enter the end game of the peace process?

But is it not precisely Ireland's positioning at the centre of EU policy-making which has created the confidence to reach a settlement with Britain? That's politics.

Perhaps from the critics' point of view Britain's wait-and-see policy is the last barrier to the EMU project succeeding? That's politics too. But would it not be better for Britain as well as Ireland to be in rather than out even if it were to fail? It would certainly be safer for Europe as a whole.