What does Independence mean for a Small Open Economy?

The Exercise of Irish Economic Sovereignty in Long-Term Perspective

Frank BarrySchool of Business

Trinity College DublinEconomic Aspects of Constitutional Change

Edinburgh, 19-20 September 2013

Outline

• The exercise of fiscal autonomy

• Monetary autonomy

• Migration policy

• Some thoughts on the current economic crisis in Ireland

• Political independence for many newly established states is associated with an attempt to diversify away from or otherwise reduce economic dependency on the former hegemon or colonial power.

• “One of the central thrusts of Irish economic policy… has been to reduce the country’s trade dependence on the UK. Policy initiatives with this aim in mind have included EU entry in 1973, the break with sterling in 1979 and subsequent entry of the Irish pound into the European Monetary System, support for the establishment of the Single European Market in 1992, and adoption of the euro in 1999”

– Official policy statement on Irish foreign economic policy (Forfás, 2003)

National Income per capita: Ireland, UK and EU14 (PPS)

Fermoy, 1955

• The radical use of fiscal autonomy in the trade sphere (with tariff protection giving way to export and FDI incentivisation) would eventually lead to diversification away from Britain

Export Market and FDI Source-Country Diversification

  UK (%)

Rest of Europe

(%)

North America

(%)

Rest of World

(%)Share of exports, 1960 73      Share of Manufactured Exports, 2010

11 38 32 (USA) 19

…Foreign-owned Firms 8 38 34 (USA) 20…Irish-owned Firms 40 38 10 (USA) 12Share of Services Exports, 2011

18 45 9 28

FDI Liabilities, 1950 ≈ 100      FDI Liabilities, 2001-03 24 14 59 3

Strong regional-policy dimension under both regimes

Figure 2: Population Growth in Ireland and Scotland, 1926-2011 (1926=100), and in Peripheral Regions (1951=100)

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Scotland

Irish periphery

Scottish periphery

• In 1979 the two hegemons (the future eurozone and the UK) diverged, and Ireland was forced to choose

– Was the introduction of the euro really about the Single Market, or was it instead a federalist project?

• The sterling link was not entirely broken as yet– Ireland devalued 3 times within the ERM (1983,

1986 and 1993), each time in response to sterling weakness

Government-comissioned report into the costs and benefits of EMU membership (1996)

• “Whatever other derogations Ireland may have received over the years, they are as nothing compared with failure to join the EMU. Such a result would entail risks which are hard to evaluate, but may be considerable”.

• Outsiders may be penalised in a downturn. Required assistance may be less forthcoming.

• De Grauwe (1998) warned of the increased risks of banking crises and contagion unless regulatory and prudential control of banking were centralised at supra-national level.

• Also warned that failure to create a European government with similar responsibilities to current national ones “creates the risk of the break-up of the monetary union”.

• The reduced role of the Commission in governance of EMU also seems not to have been appreciated.

The current downturn

Figure 3: Irish GNI per capita relative to UK GDP per capita (PPS)

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