Euro Membership

If membership if the EU Single Market has proved unequivocally positive for Ireland the evidence regarding Irish membership of the Eurozone and the effect the single currency has had on the economy is more mixed. The decisive moment in propelling Ireland toward the new currency zone came in 1979 when Ireland joined the European Monetary System (EMS), the forerunner of the Economic and Monetary Union (EMU). This constituted a major break with the past: the Irish pound had been closely aligned with the Pound Sterling since independence in 1921 and the impact of this was as much psychological as it was financial. EMU allowed Irish banks to provide access to mortgage finance at historically low rates. The result of this was that mortgage rates, which had traditionally been significantly higher than those of other continental economies began to converge rapidly toward the European norm as the countdown to the introduction of the Single Currency unfolded. Subsequent to 2002 house prices in Ireland rocketed. However, with the onset of the global financial crisis, the Irish property sector collapsed, with prices of residential properties falling by 51 per cent from their peak in September 2007 to March 2013. The resulting collapse of the construction and banking sectors meant that the Irish economy entered a very deep recession in 2008.

The crucial question here is the extent to which Ireland’s membership of the Single Currency, and in particular the low interest rate climate, played in the build‐up to the crisis. Some in Ireland blame the low interest rate regime associated with the Euro for causing the housing bubble and resulting crash. Others think the weight of blame is better placed on Irish fiscal and regulatory policy. After all, other small states within the Eurozone had the same ‘temptations’ associated with low interest rates and resisted them with proper regulation of the housing market. Austria and the Netherlands are similar-sized economies within the Eurozone yet neither experienced a housing bubble after the introduction of the Euro. While the authorities may not have been able to do much about the low interest rates associated with euro membership, they had the power to place limits on mortgage lending (limiting multiples of income or requiring large down‐payments, measures the Irish Central Bank finally introduced in early 2015) and to restrict the exposure of individual financial institutions to property development. But the lengthy period of success during the ‘Celtic Tiger’ years lulled policy makers into a false sense of security, they neglected to ensure the basics: a robust tax system, and above all, according to the Governor of the Irish Central Bank, Patrick Honahan, they largely ignored the need for conventional prudential regulation of the main banks, allowing a rogue bank’s reckless expansionism to destabilize the whole sector. Peadar Kirby’s conclusion is that if Europe is widely seen to have contributed to Ireland’s economic development over the decades since joining the EU, then its role in the banking crisis is one that (because of the EU’s imposition of austerity) placed a huge burden on Irish taxpayers and made the prospects of speedy economic recovery much more difficult. Even allowing for the dramatic contraction of the economy as a result of this extended recession, however, Ireland’s position within the EU remains relatively strong. After several successive years of austerity, by 2014 Irish GDP per capita remained at about 100 percent of the EU average.