In the volumes of analysis, advice and recriminations that the latest spasm of Ireland's economic crisis has called forth, one supposed culprit has featured more than any other: the euro. If only, it was first whispered in the corridors and is now shouted from the rooftops, Ireland had not joined the single European currency, it would not now be in the financial mess it is in. It would have had the flexibility to devalue its currency that Britain, among other non-euro currencies, has applied, and the Dublin government would have been saved its humiliating appeal to the European Union and the IMF.
To which there can be only one answer: dream on. Ireland may be hampered to a degree – a very small degree – in extracting itself from its predicament by the constraints inherent in euro membership, but the euro is not what plunged Ireland into this crisis. Ireland, its banks and its government, were the authors of their own misfortune. Their mistakes were the very same as those that brought Iceland to the edge of ruin, forced the British Government to take major banks into public ownership, and most recently brought Greece to plead for a bailout similar to that now agreed in principle for Ireland.
All were guilty of allowing, even encouraging, an economic boom fuelled largely by credit and property prices. For want of adequate regulation or political will, the governments stood by as their countries' financial sectors expanded far beyond what could be sustained. The euro was neither here nor there – neither Iceland nor Britain were members – improvident economic management most certainly was.
If any culpability can be attached to the euro, it could be – paradoxically – in the sense of the collective financial security it generated. While the success of Ireland's economy was associated with its membership of the European Union, Dublin's subsequent decision to join the euro might have contributed to over-confidence and helped its banks to raise excessive credit.
Now, though, as with Greece, the euro is proving less a part of the problem than a part of the solution. Irresponsible euro-membership – which is what both Ireland and Greece are guilty of – is now as much, if not more, of a danger to the stability of the euro as it is to these two ailing economies.
This is unfortunate in the extreme, as the eurozone as a whole survived the major part of the international financial crisis in relatively good shape. Thanks to strict national rules and judicious leadership from the ECB, its banks – with a few dishonourable or unlucky exceptions – were less debilitated by toxic financial instruments than many. This had a downside: the strong currency put eurozone economies at a disadvantage relative to those of the US and Britain which were able to devalue. But it was the extent of their indebtedness that forced Greece, and now Ireland, into bailouts, and it is the strength of the eurozone economies, primarily Germany's, that has made those bailouts possible.
Two clear lessons emerge from what has happened. The first is the need not for a looser eurozone, but for one that is closer and more rigorously supervised. Ireland and Greece flouted the rules, but the fallout, if it cannot be contained, threatens the euro's very existence. New regulatory instruments must be agreed, if possible without reopening the Lisbon treaty. The second relates to Britain, which remains outside the single currency. It can be argued that this was right or wrong – we believe that the UK should in time join the euro – but non-membership has not kept Britain aloof. Even a Conservative Chancellor has had to admit that, for Britain, Ireland is too big a partner to fail. In or out of the eurozone, we are – as the Coalition likes to say – all in this together.Reuse content