Tuesday, December 23, 2008

Losing our competitive edge

Economists Anthony Leddin and Brendan Walsh explain why being in the Euro is such a problem for us and advise potential applicants - Iceland, Poland, Denmark, etc. - to have a good look at Ireland before making the leap.
Between 2000 and 2003, the Irish economy suffered a 30 per cent loss in price competitiveness relative to all our trading partners taking both exchange rates and relative inflation into account. This loss of price competitiveness hurt domestic export and import-competing firms, leading to a fall in the growth rate and inflation but placing the economy closer to a sustainable trajectory.

An independent Central Bank of Ireland would undoubtedly have started the adjustment process earlier - raising interest rates as inflation rose and unemployment fell. But, as a member of the European System of Central Banks, the Irish authorities were limited to sounding unheeded warnings in the Quarterly Bulletin.

… Contrary to what was required under Irish conditions, the ECB cut interest rates from 4.75 per cent to 2 per cent between 2001 and 2003. Given the high Irish inflation, the result was negative real interest rates which added fuel to the already unsustainable boom.

… Following two years at a sustainable growth rate in 2001/02, the economy again picked up and the real growth rate averaged 5.3 per cent per annum between 2003 and 2007. Unemployment averaged 4.5 per cent and another 290,000 net new jobs were created. But inflation remained well above the EMU average and price competitiveness continued to deteriorate.
They don't argue that we should leave the Euro, but an obvious sub-text here is that we probably shouldn't have joined in the first place.