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.

9 comments
  1. Northern Ireland is part of the United Kingdom, so I don’t really follow your logic there; they use sterling and are part of the UK economy etc. The dispute in the North is about those who want to join the Republic and those that want to remain in the UK; religion comes into play because most Republicans are catholic and most Loyalists/Unionists are protestant -they are not fighting about religion. As regards the Euro, have you considered the fact that last year Ireland had the second highest trade surplus in the EU after Germany. To what extent does Ireland benefit from being the only english speaking country in the EU as regards FDI? You say that the: ‘The UK is one of few countries in Europe which actually believes in independence and democracy’, but mention one of the reasons the UK would want to ‘help’ Ireland as: ‘colonial guilt… [Ireland] used to be a British colony for 750 years.’ I see, well I’m glad that the British had a change of heart! Anyway, these are interesting times.  

    1. Unfortunately Irishman, economies don’t work that way. Northern Ireland’s economy is very much connected to the Republic’s economy as there is a lot of trade between them. Northern Ireland isn’t some kind of isolated island – and even if it was, it would be sharing that isolated island with their southern neighbors. Ireland’s trade surplus comes from having a lot of multinational corporations, for example in high-tech. Being part of the eurozone helps, but the trade surplus wouldn’t disappear. As long as you have a stable, credible currency you’ll be just fine – and mind you, the sterling is more stable and more credible than the euro will ever be. 

      Yes, guess what, people can and do change. The UK isn’t colonialising the world anymore, and frankly you Irish need to get over it. So they oppressed you for 750 years, just move on will ya! You weren’t oppressed, you have no reason to be mad with the UK. And today, as they have recently demonstrated in opposing the new treaty, they are indeed standing up for democracy and independence.

      1. Hi John, thanks for the reply. I don’t think you followed my criticism. Why is Northern Ireland anymore of an excuse to help the Republic, than simply the fact that the Republic is a major trading partner with the UK simpliciter? What ever happened in the Republic, the UK would shield Northern Ireland’s individual economic exposure by way of fiscal transfers. British bank exposure to Ireland is around £140 billion, so considering the Irish government has underwritten the debts of private Irish banks, it’s easy to see why the UK would be interested in Ireland’s economic well being -whatever about protestants and catholics in a region of Ireland that is part of the UK and thus part of their economic responsibility anyway.

        I am aware of the role that multinationals play in Ireland. However, it is often overstated. To take one example: there are about 150 medical device companies in Ireland, 70 of which are Irish. Multinationals employ around 130,000 people here, while Irish companies employ around 80,000 people in the US. I could go on. Anyway, my point was that Ireland being the only english speaking country in the eurozone is a factor, and that clearly Ireland has benefitted from the Euro as regards trade. As regards Ireland’s debt, if it left the Eurozone wouldn’t its debt still be denominated in Euro?

        As regards colonialism -hey, sure you were the one that brought that up! I was just pointing out that the UK doesn’t have any greater claim to being the protector of independence and democracy than other EU countries (does gerrymandering mean anything to you? Bloody Sunday?).

        As regards opposing the new Treaty, well isn’t it the case that many in the UK are uncertain about whether that was the right thing to do. The UK has a large national debt and a large banking exposure to France which lent heavily to Italy and Spain. 2012 should prove interesting one way or the other. I think Cameron was thinking more about the independence of The City; and the views of his backbenchers than any loftier principle -national interests motivate the other big players such as France and Germany too. That is all. 

      2. John, Good article but think you are maybe now jumping to conclusions. You say he wasnt opressed but how do you know he isnt in Derry or anyhwere in the north and spend every week getting a hounding by the British army.

        You have an interesting article but you are missing the context a bit, or maybe ignoring it, simply because its the current set up.

        Norway

      3. “every week getting a hounding by the British army” … you forgot to mention the Black and Tans. And what about that Cromwell guy? I know they dug up his corpse and beheaded it sometime after 1660 but you just can’t trust those Brits, can you?

  2. As much of a good idea it is for Ireland to have sterling currency I doubt people of Ireland would want the queen of England’s head on their money considering the history between the 2 countries.

    1. I know about the history, but I think this crisis has brought the countries closer and I believe most Irish (in particular younger Irish) are ready to think about the future, not the past. At least I hope so.

      1. People are open to considering the economic implications and even willing to ignore the frequent tendency of the London govt. to dispense with the pretense that any part of this land was an integral part of the UK where UK norms applied (most recently the reluctance to use water cannon in London etc and god forbid plastic bullets).  However consider the way David Cameron unitlaterally acted in the interests of London recently without any consultation of the devolved administrations in Scotland, Wales and the northern part of this country. How would we fare?

        Also would they want us in? Would we not only assist the Scots leaving?

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