Madam, – As a non-practising economist who now works in compliance and regulation, it seems to me that perhaps the main cause behind Ireland’s economic crisis is its membership of the inflexible single currency, an institution which arguably it should never have joined in 1999.
The transfer of economic sovereignty to Brussels and Frankfurt meant that Ireland no longer had the power to control its own monetary and exchange rate policy, unlike the UK, which chose to retain sterling. During the bubble years up until 2007 when many of the idiotic lending decisions were being taken by Irish banks, Ireland should have had very high interest rates to rein in cheap consumer and mortgage credit and inflationary pressures. In January 2006, the European Central Bank’s main interest rate was only 2.25 per cent with inflation hitting 4.2 per cent, while for 2006 as a whole, Ireland’s GDP surged by 6 per cent and its gross national product by 7.45 per cent. This negative real interest of 1.95 per cent resulted in companies and consumer households being paid to borrow and development projects to go ahead at absurdly artificial rates of return. The whole country was awash with cheap credit with the commercial banks acting as the transmission mechanism linking the central bank to consumers. Real interest rates at this time should have been in the order of 8-10 per cent in order to rein in the herd instinct of consumers and bankers.
If Ireland had retained its own currency, it would have had the ability to set its own interest rates and inflation targets (like the Bank of England) as key components of its own monetary policy, not beholden to the dictates of the European Central Bank. In addition, by having its own currency and monetary policy Ireland would have had more control over its exchange rate, resulting, arguably in a healthier balance of trade and productivity, both of which declined markedly after 2000.
The downgrading of Ireland’s debt by the rating agencies has meant that consumers are having to pay a very high cost not only for the greed and profligacy of the bankers and developers but also for the Government’s failure to retain control over its monetary and exchange rate policy. Contrast this with the UK, which did retain its own currency. Although it was subject to a severe banking crisis of its own, through the demise of Northern Rock, RBS and Lloyds, it has not experienced the same boom/bust extremes of economic madness. – Yours, etc,