OPINION:Sure we feel humiliated. But the idea that Ireland ever was – or will be – economically autonomous is delusional
The collapse of the Irish economy and the recourse to the emergency EU-International Monetary Fund bailout in late 2010 sparked a wave of criticism bemoaning Ireland’s loss of economic and financial sovereignty.
Political leaders and many commentators have unanimously stressed that saying goodbye to the troika and regaining sovereignty is a critically important goal of government.
The sight of AJ Chopra and his colleagues making regular well-publicised inspection visits to Dublin to “check up” on the Government’s performance before agreeing to dole out the next tranche of the bailout funds is understandably viewed by many as a source of loss of national pride, if not indeed humiliation.
Yet, there is a danger that this emphasis confuses form with substance.
Even before the bailout, how much economic sovereignty did Ireland, as a small, open economy, really possess? And when the rescue ends, what degree of flexibility will we have to conduct our own financial affairs?
Dangerous expectations
There is a danger that public expectations post the bailout will be raised to unrealistic levels. Moreover, there is very often a trade-off between accepting a significant diminution of economic sovereignty and the goals of pursuing growth and increasing living standards.
In the globalised world virtually no country has full economic sovereignty. The freedom for national governments to make decisions independently of other governments and even corporations is increasingly restricted .
Even larger countries enter into trade agreements that limit their scope for action, while very many decide to adopt exchange rate arrangements which often place major constraints on national macroeconomic and financial policies.
Crucially, a country that decides to open its economy to foreign direct and financial investment – and to take advantage of the net benefits this entails – cannot avoid having to accept external market judgments .
In the current globalised world, economic sovereignty is inherently a relative concept: the ability to negotiate key issues varies – some aspects are flexible while others may be largely non-negotiable.
Like many small countries, Ireland has wrestled with the issue of economic sovereignty ever since independence. From the outset, the link to sterling effectively ensured our financial policies were fully aligned with those in the UK.
However, until the late 1950s, government policy was aimed at keeping the economy closed-off from significant foreign direct investment, which meant Ireland missed out entirely on the post-war boom in Europe. Sovereignty was maintained, but at a huge cost in terms of lower living standards, higher unemployment and mass emigration.
Following the liberalisation of foreign direct investment in the Lemass era, Irish policy has shifted towards greater openness via increased Europeanisation. This has involved a gradual, but very significant erosion of sovereignty, accompanied, however, by what would be generally viewed as major economic benefits.
Joining the Exchange Rate Mechanism in 1979 meant that credit and interest rate policy largely followed that of the German Bundesbank (with devaluation of the Irish pound against the Deutsche mark to maintain competitiveness). The later adoption of the euro copperfastened Ireland’s relinquishing of monetary policy. Those unhappy about this loss of sovereignty could seek solace in the belief that Ireland’s fiscal policy was still under national control.
In a narrow sense, this remained true. However, in the mid-1980s, the large budget deficits and build-up in debt led to a major loss of domestic and external confidence, with recourse to the IMF only narrowly averted. This episode reinforces the key point that small, open economies are only free to follow expansionary financial policies for a sustained period if they do not endanger creditworthiness and retain support of international financial markets.
The current crisis manifests this. The massive borrowing of Irish banks to finance an unsustainable property bubble left Ireland exposed to sudden changes in the international financial environment. Arguably, the true loss of sovereignty occurred for Ireland not with the troika’s arrival but when reckless policies left Ireland so dangerously exposed.
Looking ahead, for the euro area to function effectively, the ability of highly indebted countries such as Ireland to repeat the recent policy mistakes will be significantly circumscribed. Already, the main “loopholes” – inadequate implementation of the Stability and Growth Pact and absence of a European-wide bank supervisory structure – are being closed.
Undoubtedly , some aspects of fiscal policy will remain in national hands (for example, choices about expenditure on social protection and capital investment). However, German chancellor Angela Merkel recently stated that “wage-setting and taxes – the core powers of a nation state – [would have] to be rather co-ordinated”. Although she added the qualification “obviously carefully observing national democratic procedures”, the message was clear. If the euro area is to work, more, rather than less, sovereignty will have to be ceded to the centre.
Assuming that a progressive integration of fiscal policy starts to take place, Ireland may well face policy dilemmas. Difficulties are likely to arise with harmonisation of corporate tax regimes and a financial transactions tax.
Centralised direction
Political views will differ as to the desirability of moving in a more centralised direction. But for countries that have reaped major benefits from European integration, continued membership of the European club is likely to inevitably involve further loss of sovereignty.
In Ireland’s case, it is more a question of aligning the formal appearance and structures with a reality that has existed for quite some time. And this tendency may well be in countries’ own best interests as a properly designed and prosperous euro area should benefit everyone.
This is the central trade-off that needs to be debated openly. Emphasising the hoped-for departure of the troika from Dublin at the end of 2013 and engaging in undue self-congratulation about a return of economic and financial independence misses out on the far bigger picture.
Donal Donovan is a former deputy director of the IMF and is a member of the Irish Fiscal Advisory Council. He is co-author with Antoin Murphy of The Fall of the Celtic Tiger: Ireland and the Euro Debt Crisis, to be published by Oxford University Press. Rafique Mottiar is a former senior economist of the Central Bank of Ireland