What Happens to Ireland If It Ditches the EMU?

What Happens to Ireland If It Ditches the EMU?

Working in a building called the "European Research Institute," you cannot expect me to rehash Eurosceptic rhetoric about EU members surrendering sovereignty to Brussels and all that jazz. Fortunately, there are bazillions of blogs out there if that's your thing. If anything, I am a fierce proponent of giving up the pound and adopting the Euro. However, many others here in Britain and across the continent do not share my sentiments. Witness Ireland's recent referendum where it turned down the adoption of the Lisbon Agenda. Admittedly, the agenda is a warmed-over version of the EU Constitution which France and the Netherlands turned down in 2005. So, once again, dreams of an ever-closer union have been put on hold. While the EU's powers-that-be have demanded another referendum from Ireland, its results are by no means guaranteed to be more favourable than the last one.

Ireland has been an oft-cited example of the benefits of European economic integration. Nicki Smith, a colleague here at the University of Birmingham, even pondered the question of whether Ireland was Showcasing Globalisation. Before embarking on its modernisation programme, Ireland was more famous for its sizeable diaspora leaving its moribund economy. More recently, Wolfgang Munchau has pondered the question of what would happen if the Irish went further down the Eurosceptic road and decided to abandon the EMU altogether. Surely, if Ireland turns down another referendum, that path cannot be far in the distance. As I heartily approve, he gives the idea two thumbs down (plus two big toes down to boot). Below are some excerpts, but do read the whole thing if you're interested in the terrible fate that will surely befall the Emerald Isle should it decide to go it alone. Even the Lone Ranger needs Tonto:

So within a couple of weeks, the chances of Ireland ending up outside the EU have turned from zero to a distinct possibility. The same goes for the Czech Republic, another potential non-ratifier. I do not want to get into the legal details of how a country’s departure from the EU could be accomplished. Suffice it to say that it can be done within European law as long as there is political will.

What strikes me the most about this extraordinary turn of events is the perception in Ireland that a break with the EU would be no big deal. I received a large number of letters from Ireland last week from readers who steadfastly maintain that the country’s economic success had nothing to do with the EU and everything to do with domestic policy – in particular with low corporate taxes and skilled labour.

The view expressed by those correspondents is as wrong as it is revealing. If so many people are delusional about their country’s economy, then we should perhaps not be surprised about the outcome of the referendum. It is therefore perhaps worth looking in some detail at the nature of Ireland’s economic success over the last 30 years to gauge what life might be like outside the EU...

Ireland was one of the early and enthusiastic members of the European Monetary System in 1979, which brought much needed macroeconomic stability. Membership of the eurozone in 1999 led to lower interest rates, which have contributed to the economic growth ever since. Low corporate tax rates certainly helped Ireland attract foreign investors. But never forget that Ireland is also the only English-speaking member of the eurozone, the one place where eurozone and Anglosphere meet.

The country naturally benefited from membership of the EU’s internal market. Without it, Ryanair, the Irish low-cost airline, would not be able to offer its popular flights across Europe. The Irish have also proved influential in the management of the internal market, not least through Charlie McCreevy, the Irish commissioner in charge of the EU’s internal market and financial services. As a member of the EU, Ireland has been in a position to veto motions that would have impaired the country’s economic success. Without steadfast opposition from Ireland, the EU would have made more headway in imposing corporate tax harmonisation...

So what would happen if Ireland were to leave the EU? As an associate member of the single European market, Ireland would probably attract less foreign investment than it does today. Dublin’s financial centre would be demonised as an offshore tax haven and treated on par with Liechtenstein. We would see lots of Ryanair flights between Dublin and Cork and the EU would put even more pressure on Ireland to raise corporate taxes.

Oh, and by the way, Ireland would no longer be a member of the eurozone. The Irish could use the euro if they wanted to but this would be like Panama using the dollar – a little sad, really. There would be no Irish voice in the European Central Bank’s governing council warning that this is not a good time to raise interest rates. Leaving the EU involves a huge loss power and influence.

To put it mildly, the No vote is highly risky. Considering that the country is now on the verge of a severe economic slowdown, brought on by a downturn in the real estate market and the credit market crisis, it could not have come at a worse time. Not only does the No vote carry risks, it is a highly asymmetric gamble that brings no material benefit under the best of circumstances. The No vote put Europe’s most impressive economic miracle at stake, and the cards are not looking good.