The Irish economy may not become any more synchronised with the rest of Europe despite joining the euro, according to new research from UCD professors Brendan Walsh and Rodney Thom.
In a paper they will be delivering this weekend at the UCD graduate business school, they argue that joining the euro is unlikely to affect trade.
According to Mr Thom, the euro will not mean that the Republic will integrate further or faster with the core countries of Europe or that the economies will become more synchronised. This also means that inflation is likely to remains as dependent on the value of the currency as it is today. Many had hoped that the recent surge in inflation was a once-off adjustment in prices to match European levels. However, if the UCD thesis were correct it would mean inflation could remain high if the euro remained weak against currencies such as sterling and the US dollar.
The paper, which was written for the US's most prestigious economic research organisation - the National Bureau of Economic Research, which is meeting in Dublin, points out that 70 per cent of our imports are from non-euro countries and joining the euro will not change that.
If it is true, as many argue, that countries using a common currency trade far more with each other than comparable countries that use separate currencies, the adoption of the euro should prove to be a major stimulus to euro-zone trade. This in turn should bring significant economic gains.
This would imply, they argue, that ending the link between the Irish pound and sterling would have had a significant adverse effect on Anglo-Irish trade. Using the Irish experience before and after the decision to break from sterling as a "natural experiment", they conclude there is no evidence that the volume of Anglo-Irish trade suffered after the Republic decided to join the European monetary system's exchange rate mechanism (ERM) in 1978/9.
At the time of the pound's introduction in 1927, a currency commission was established to maintain the new currency on a one-to-one basis with sterling. In effect, the Republic continued to share a common currency with Britain while gaining the bonus of a national currency. This continued after the Central Bank was set up in 1943 and was only broken when maintaining the link proved incompatible with the ERM, and the Irish pound was floated within ERM fluctuation margins.
In 1993 after the breakdown of the system it floated freely. This meant that after 1979 the pound was volatile against sterling and the dollar, whereas up to that point it had been volatile against the major European currencies. Because Irish trade with Britain and the US continues to outweigh trade with all other countries combined, the overall volatility has been higher since 1979 than it was under the sterling link.
Using a battery of statistical techniques, the authors fail to find any evidence that the decline in Britain's share of Irish trade accelerated after the introduction of an exchange rate between the two countries.
Irish trade with Britain continued to grow rapidly and, by 1998, had risen to three times its 1978 level. While trade with other countries - exports in particular - grew more rapidly than trade with Britain, this was a trend that had been apparent since the 1960s - long before there was a realistic prospect of breaking the sterling link. Indeed, it is likely that the share of Anglo-Irish trade has been underestimated. This is partly because of the perennial phenomenon of cross-border shopping and smuggling.
In 1986 it was estimated that purchases by residents of the Republic in the North amounted to 2 per cent of total personal consumer expenditure. Now because of the weakness of the euro and higher levels of excise tax in Britain, the flow of trade is predominately from north to south.
It was recently estimated, for example, that the UK treasury is losing around £300 million sterling (€493 million) because of illicit sales of fuel smuggled from the Republic to Northern Ireland.
The authors admit that it is still too early for an assessment of how membership of the euro is affecting Irish trade patterns, but the euro zone does not appear to be increasing its share of our trade. During 2000, the US became the Republic's largest export market.
However, they also warn that we have to be circumspect in generalising from the effects of abandoning the common currency between the Republic and Britain to the repercussions of the 12 states of the euro zone adopting a common currency. Yet, the fact that Anglo-Irish trade continued to grow at a healthy pace despite the introduction of exchange rate uncertainty in 1979 gives grounds for scepticism about the magnitude of the likely effects of economic and monetary union on trade patterns.
