ECONOMICS:EMU countries do not want a member country to get into difficulties - that might raise questions about the viability of the currency union, writes MICHAEL CASEY

RONALD REAGAN may not go down in history as a great international statesman but he played a major part in bringing the cold war to an end. This was symbolised by the tearing down of the Berlin wall, with the agreement of Gorbachev, and was one of the most significant events of the 20th century.

From that point on writers such as Francis Fukuyama spoke about the “end of history”. This proved Panglossian and in just a few years we experienced major wars in the Middle East and, more recently, the near collapse of the capitalist system.

One of the results of German reunification, however, was the creation of the European Monetary Union (EMU) that ultimately led to the euro currency and the enlargement of the EU to include many of the former satellite countries of the Soviet bloc.

The creation of the EMU posed a difficult decision for Ireland, especially when it became clear the UK intended to stay out of it. Senior figures in the public and private sectors were against Irish membership of the EMU unless the UK joined as well. Those who were in favour argued we would attract more foreign direct investment from the US, our inflation rate would remain anchored and there would be little exchange-rate volatility to worry about in the future. Because of the latter, the miasma of red tape associated with exchange controls could be dispensed with.

It was pointed out that interest rates would be lower than in the past and would probably remain on the low side. It was made clear that since interest-rate and exchange-rate adjustments would no longer be available as policy tools, great care would have to be taken to maintain competitiveness by other means.

This advice was ignored in the years which followed. But that was the fault of the Irish government and social partners, not the fault of the EMU. The same can be said for the effect of low interest rates on property prices; the authorities here stood idly by while in the banking sector the inmates took over the asylum.

On balance, most people would agree the EMU has been good for Ireland and was an important reason why US multinationals established a presence here. Qualifying for membership of the EMU was also a useful discipline in terms of controlling inflation and maintaining fiscal stability.

Since the Irish banks hit white water we can really see the benefits of EMU membership. Irish banks have had generous access to the liquidity window of the European Central Bank, at a time when international money markets seized up. Under the National Asset Management Agency (Nama), Irish banks can pledge their Government bonds for additional liquidity from the ECB which, given its size, can cope with Irish needs with little difficulty. This in turn benefits our credit-rating on private international markets.

Contrast our situation with that of Iceland. The three main Icelandic banks had accumulated massive external borrowings that they could not refinance. Iceland did not have the benefit of a huge central bank like the ECB as a back-stop. While other Scandinavian countries came to the aid of Iceland, the support was ad hoc because there was no institutional structure in place. Moreover, the Icelandic currency suffered a devaluation in excess of 35 per cent and the rate of inflation shot up to over 14 per cent. The sovereign-debt credit rating was marked down to BBB (low) and eventually the IMF had to be called in.

Ireland had not only the benefit of the ECB but also the expertise of the EU Commission, which helped the Government draw up its fiscal consolidation plan and the main provisions of Nama. EMU countries do not want a member country to get into severe difficulties because that might raise questions about the viability of the currency union. It would also create the impression our partner countries could not look after “one of their own”, albeit a prodigal son.

It is likely our EMU partners would be miffed if Ireland had recourse to the IMF. Practically speaking, this gives Ireland considerable bargaining power within the eurozone. In some ways, our difficulties are an important test-case for the eurozone.

Perhaps the most important point is the rest of the world knows Ireland is a member of the EMU and this confers on us a strong cachet. Whether we deserve it or not is beside the point. Plumes are impressive even if they are borrowed. We are a member of a strong squad and, even if we are not perfectly match-fit, we have access to all of the medical and other resources of the club.

The EMU does not contain any provisions for automatic fiscal transfers to member countries in trouble. In this respect, it is not as close a financial family as the US. Some commentators have argued that in the long run this could prove to be the fatal flaw in the structure. But for the moment the Irish Government can hardly complain and should be grateful for small mercies, especially from the ECB.

The EMU is one of the many significant consequences of the fall of the Berlin Wall. The opening up of European labour markets is another, and there is no doubt Ireland benefited in a major way, economically and socially, from the influx of skilled workers from Poland, Latvia, Lithuania and others during our boom years. The world has benefited from the collapse of the Berlin wall and so has Ireland.

Michael Casey is a former chief economist at the Central Bank and a former member of the board of the International Monetary Fund