My endless writings on the eurozone crisis are back by popular demand – actually, not really, but no-one’s complained so far. I’m supposed to be studying right now, but I’ve already done some reading today so I figure I deserve to write a post (you know you’re blogging too much when writing a post becomes a “naughty treat”).

I’ve spent quite some time writing about the Irish economy. This is logical since I live most of the year in Ireland, and so I’m affected by the economic crisis going on there (although compared to those actually born in Ireland, I’m very protected from the events).

Today’s subject is: Should Ireland join the sterling? I’ve been doing some thinking on this and my conclusion is that, yes, Ireland would be better of with the British pound, or sterling as it is formally called, as its currency rather than the euro and rather than introducing it’s own currency. The reasons are many. Let’s start with the reasons the pound is better than the euro:

1) Trade. The UK, not any country in the eurozone, is Ireland’s biggest trading partner by far (though Ireland also has a lot of trade with the US). 16 % of exports and 35 % of imports come from the UK, compared to just 5-6 % from Germany and France. Who you trade with is very important for your business cycle – the fact that Ireland trades a lot with the UK but not so much with Germany means that if the UK economy is doing badly, Ireland’s economy will do badly as well. The correlation between the Irish and the German economy however is much weaker. Germany and France control the eurozone and naturally they set the interest rate according to their own needs, and this means that the interest rate very often is not going to suit Ireland since Germany/France can be in a recession while Ireland is booming and vice versa. This is not the case with the UK. If the UK needs low interest rates, chances are Ireland needs it too.

2) More influence. Contrary to Germany, the UK actually cares about Ireland. Germany cares about Ireland not defaulting on the debt it owes to German banks, but the UK is not only interested in Ireland not defaulting, but also in social stability and the general well-being of the Irish people. It’s not hard to see why when you think about it: Northern Ireland. If it’s anything that the UK does not want, it is for the age-old conflict between catholics and protestants in the North to catch fire again. It’s been relatively peaceful since 1998 when the Good Friday agreement was signed, and the UK (and Ireland too btw) would certainly prefer it to remain that way. A meltdown in the Irish economy would threaten to erase all the progress that has been made and throw the North into another civil war. A bad economy is known to create social tension and conflicts. A secondary reason why the UK cares about Ireland is simply colonial guilt – it’s not very rational, but colonial guilt is still common in the UK. Ireland, for those of you who don’t know your Irish history, used to be a British colony for 750 years. For these reasons Ireland would have an easier time influencing British monetary policy than it has influencing the ECB.

3) No loss of fiscal independence. Germany, in case you haven’t been following the news, have demanded that Ireland as well as the rest of the Eurozone give up their fiscal independence. In the future, every budget will have to be approved by the ECB – in practice, by Germany and France as the rest of the countries have very little influence. Every tax hike, every tax cut, every move will have to be approved by the German overlords. While it is still not clear if Germany will get this kind of control, it doesn’t seem completely unlikely (though the UK is currently bravely blocking it). Ireland on the other hand can join the sterling without risking such a huge loss of indepedence that staying in the euro might mean. The UK is one of few countries in Europe which actually believes in independence and democracy, which makes them a perfect country to share a currency with.

But why not just introduce a new Irish currency? Before Ireland joined the currency, Ireland had a currency called punt (an Irish word for “pound”). So why won’t the punt do now?

1) Credibility. The sad fact is that few investors trust Ireland anymore, and they would have a big problem trusting a new Irish currency which is almost certain to devalue. The sterling on the other hand has a long history and a high credibility – well, higher than an Irish currency would ever have, and higher than the euro has right now. While the UK has its own share of economic problems, no-one is worried about the sterling suddenly becoming worthless. Such worries do exist about the euro, and would unfortunately exist about a new Irish punt.

2) A peg won’t do it. Many of those who are supporting a return to the punt support some kind of peg to the sterling (the Irish punt used to be pegged to the sterling so the idea is hardly new), but again there is the credibility issue: An Irish peg would almost certainly become victim of speculative attacks and Ireland would have to fight back by buying sterling. All the money that would have to spent on sterling could certainly be spent better.

3) Transaction costs. One of the benefits of being in the eurozone is that currency risk largely disappears when trading with other countries in the zone and transaction costs become significantly lower as you don’t have to trade in your German D-mark for Irish punt in order to buy from Ireland or vice versa. This is one thing that would be missed if Ireland were to leave the eurozone, but even more missed if Ireland were to leave the eurozone for an uncertain future with its own currency. The UK is Ireland’s biggest trading partner, so it makes sense to want to minimise transaction costs when trading with them.

I’m in no way denying that an Irish punt would have benefits as well, I just believe that introducing a currency that already exists is a lot less complicated and risky. Reintroducing the punt could work – but does the return really justify the risk?

Would the UK really allow Ireland to join the sterling? It’s an interesting question for sure, but I believe they would. The UK has always desired a closer relationship with Ireland, and allowing Ireland to join the sterling would be a great way to say that the past is the past and now we’re focused on the future. As a matter of fact, a British Member of the European Parliament, David Hannan, suggested Britain should reach out a hand to the Irish and offer them the sterling. Also more trade between Ireland and the UK would benefit both countries.

We should also remember that technically, Ireland does not need the UK’s permission to use the sterling. It may be useful to have (not to create diplomatic tension etc), but it’s not absolutely necessary.

I guess a few of you are wondering what this post is doing on an american blog. I get the confusion, but I think it’s time americans start looking outside their own country and begin to learn about the world. The eurozone crisis, of which Ireland is one of the countries at the centre, is pulling down the american economy as well and keeping americans unemployed. That enough I think should be a reason to care.

Thank you for reading.

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