THE ESRI's report on the economic implications for Ireland of Economic and Monetary Union provides us for the first time with a solid basis for discussion of this hugely important subject.
The summary of the main issues in the report published in The Irish Times last Saturday was a very useful presentation of the principal matters raised, but if there is to be a serious Irish debate on EMU it is desirable that the key issues be further explored.
The first and crucial point to be made is that if Britain does not join EMU at the outset (and that now seems almost certain whichever party wins the next British election) Ireland will face problems no matter what decision we may take about adopting the single currency, the euro.
For we have to recognise we area already benefiting to some degree from the expectation that we will join regardless of Britain's decision this has narrowed the differential between Irish and German interest rates. If the markets thought that we were not after all going to participate in EMU, this differential would be adversely affected, and this would impact upon our public debt interest payments and thus require some tightening of budgetary policy that would slow growth.
Leaving aside for now the quite different issue of the possible shock effects of a major British devaluation upon an Irish economy participating in the EMU, the ESRI concludes that under "tranquil" conditions the overall effect of such an interest rate increase upon employment here would he to reduce an estimated annual increase in jobs of around 35,000 to as little as 5,000 in the year 2001 and to less than 20,000 four years later. The resultant cumulative employment loss between 1999 and 2005 would be of the order of 80,000.
Thus, whatever may be the risks of Irish participation in an EMU from which Britain had excluded itself, there would also be a heavy penalty for staying outside with Britain. And, if the EMU failed to get off the ground, or if, because of French non participation it turned into nothing more than a deutschmark zone, there would also be a heavy price to be paid in terms of European financial instability. In any such circumstances output and living standards would be adversely affected, here and elsewhere in Europe.
Another point made by the ESRI is that there are other shocks we might face, whether or not we adopt the single currency, e.g. an oil price hike such as those that occurred in 1973 and again in 1979 which would lead to a destabilising upward movement in sterling economic instability in Germany, such as that which followed the unification of that country or crises specific to Ireland deriving from such developments as a sharp drop in EU transfers through the CAP and Structural Funds or in foreign investment, or from a collapse of tourism if violence spread here from the North.
Each of these alternative shocks would have a different impact on our economy, whether in or out of the EMU. In the case of an oil price shock we would be better off in the EMU, but in the other cases EMU membership would make it more difficult for us to cope.
IN ITS examination of the sterling devaluation shock the institute starts by considering what would happen to our economy if the sterling Euro relationship declined gradually.
We sometimes forget that in the period of almost 12 years between early 1981 and the beginning of September 1992 the number of deutschmarks a pound sterling would buy dropped by no less than 45 per cent. As the reduction in our pound's mark value in this period was less than 30 per cent, the Irish pound rose from stg77p to stg95p an Irish pound/sterling appreciation of one fifth. But, just as the 11 per cent gradual appreciation of our pound in the past three years has had no visible ill effects, so also the gradual appreciations of the 1981-1985 and 1987-1992 periods were sustained here without undue difficulty.
In its analysis the ESRI carries out an initial exercise on the basis of Ireland joining the EMU and Britain remaining outside, with inflation and wage increase rates 0.5 per cent a year above those of the EMU countries, thus entailing a gradual devaluation of sterling vis-a-vis the euro at a rate a good deal slower than the devaluations of the two periods just referred to.
For the purpose of this exercise the institute also makes the assumption (which I think may now be a pessimistic one) that, as in the past, Irish wages would at first rise in sympathy with such wage increases in Britain and there fore faster than in the rest of the EMU.
It is on the basis of these rather severe assumptions for what the report describes as the "tranquil scenario" that the positive employment outcome under EMU conditions mentioned earlier has" been derived. It is thus only the possibility of a sudden sharp devaluation of sterling that could create significant problems for us in the immediately following years. And for the most part only for that period, because within four or five years of the shock most of the short term benefits to Britain from such a sharp devaluation would have evaporated as a consequence of the gradual post devaluation upward adjustment of British prices and wages.
In order to assess just how great the impact of such a sudden sterling devaluation would be, the institute first of all calculates what the impact on us would be of an overnight 20 per cent sterling devaluation. Then, these data are used to calculate what would happen in the future if an Ireland that was unable within the EMU any longer to devalue its currency in such a situation faced the kind of shocks it underwent from the 1970s onwards as a result of what happened to sterling during that period.
THAT decline was, of course, occasioned by British economic mismanagement. It included two 15 per cent devaluations a quite rapid one in the first half of 1986 and a sudden one in September, 1992. Now, it seems to me that a repetition of that disastrous performance is quite a stringent assumption to use for the future, for clearly Britain like ourselves and other countries which have mismanaged their economies in recent decades must have learned something from its mistakes. In a world in which inflation has been brought substantially under control, Britain is in fact most unlikely to undermine its economy again by setting off new inflationary cycles.
What is interesting is that, despite the stringency I might almost say pessimism of these assumptions, the short term and medium term adverse impact of the shocks to our economy that would be generated in this way, in circumstances in which we would no longer be free to meet such crises by sympathetically devaluing our currency, would be relatively modest.
This is partly because of the offsetting beneficial impact of our EMU participation. An important element of that beneficial impact will, of course, be the "credibility" effect of Irish EMU membership upon the level of Irish interest rates both Government bond interest rates and wholesale rates available to the enterprise sector.
This credibility effect is estimated by the ESRI to involve a long term 1 per cent interest rate reduction by comparison with the interest rate level that would eventually prevail here if we stayed outside the EMU with Britain. This may be an over cautious estimate of the interest rate benefit others have arrived at higher figures.
However that may be, the ESRI estimate of the net consequences of Ireland joining the EMU without Britain, including absorbing shocks on the scale outlined above, is that our GNP would be increased marginally it is true and that on balance employment would be boosted, perhaps by a net increase of some 10,000 jobs.
This is a figure for the expected net increase in employment after allowing for possible reductions in the numbers employed in certain vulnerable sectors of manufacturing, construction and banking.
Of course, as the ESRI itself states, these estimates can be only an approximation. But they undoubtedly discredit, the, "doom and gloom" scenario being promoted by some opponents of Irish EMU membership.
CORRECTION
In my article of July 20th on employment statistics, RTC students should have been referred to as "securing a certificate after two years, a diploma after three, and a degree after four".