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NESC study on the Euro raises serious questions, makes concrete proposals

The National Economic and Social Council (NESC) has published a report, The Euro: an Irish Perspective. It is part of a broader study being conducted by NESC on Ireland and the EU.
 
On the Euro the Council’s analysis shows that:

  • Membership of the euro has been beneficial to Ireland, and if Ireland had not joined it is likely to have fared worse in the crisis of the past two years;
  • In the past decade, Ireland’s approach to fiscal policy, prices, costs and financial regulation were not sufficiently adapted to the disciplines of a single currency.
  • Despite important steps in the past year, the euro faces severe challenges: the effectiveness of the financial support provided to Greece, the recovery of the whole European economy in the context of fiscal austerity and the continuing risks to the financial system at global and European level.

 
This analysis leads NESC to three main policy findings:

  • The future stability of the euro area depends on more effective surveillance and coordination of member states’ fiscal positions and structural policies, stronger EU-level financial regulation and an ongoing reform process which addresses both immediate problems and the dangers which threaten the prosperity of the euro area.
  • To succeed within the euro, Ireland must ensure that future fiscal policy is counter-cyclical and sustainable, prices and costs maintain Ireland’s competitiveness, and financial supervision prevents irresponsible banking practice;
  • At both EU and national level, the success of the euro requires greater political and popular buy-in and acceptance of the need to for mutual surveillance, benchmarking and learning.

 
The NESC study makes the following further key points:
 
More Effective Euro Area Surveillance and Policy Coordination
For all its undoubted achievements, the design of the euro has not avoided the imbalances and deficit/debt crises it was intended to prevent. Working together, the
EU institutions and member states have taken a series of actions and decisions in response to the crisis in the euro area. While these steps have stabilised the situation, there remain severe challenges on three fronts, as listed above. In addition, large movements of currencies, such as sterling, can damage other member states and the single market.
 
Some see these problems and dangers as reason for immediate radical adjustment of the policy competences and decision making systems governing the euro and the EU. The more pragmatic and gradualist approach adopted by the European Council and the Commission includes a focus on better joint surveillance of economic policies, a closer link between fiscal policy and structural reform and a willingness, in certain circumstances, to adapt the division of labour between monetary and economic policies.
The reform process now underway must ensure that the governance mechanisms that the EU has made effective in other policy spheres, such as the internal market, are now brought to bear in the euro and associated economic policies.
 
If this reform process is undertaken in an open-minded way, it should be possible for the EU to discuss and agree a pragmatic combination of measures that protects the euro, addresses the deficit and debt problems, supports macroeconomic recovery and responds to the risk of further financial sector and exchange rate turbulence. Ireland has a strong interest in the success of this process.
 
Policy Lessons for Ireland
The severity of the current crisis should make us absolutely determined to learn the correct lessons and make the necessary changes in policies and behaviours. The principles which should inform fiscal policy are clear: it must be counter-cyclical, sustainable and respect the EU Stability and Growth Pact.
 
But our analysis shows that the understanding and application of these principles proved difficult in the past decade. It requires a correct assessment of the drivers of economic growth, the state of the economic cycle and identification of asset price bubbles. Uncertainty on these questions interacted with a set of unresolved political economy issues. Among these were: the appropriate scale of public services, the level and incidence of taxation, and approaches to housing supply and land management. The tax windfall created by the property boom allowed the unresolved issues to be glossed over and the macroeconomic perspective on fiscal policy to fade from view.
 
The policy lessons are hard, but also broad. They certainly demand that government maintain a clearer focus on stabilising the economic cycle and the long term sustainability of the public finances. But this requires a more thorough resolution of the distributional and structural tensions that create pressure for pro-cyclical fiscal policy and tend to crowd out clear analysis of the macroeconomic context. Structural policies—especially those that shape the supply of housing and other goods with a public dimension—can help to ensure that fiscal policy is counter-cyclical and sustainable.
 
The Need for Greater Understanding and Buy in
The problems in the euro area arise, in part, from insufficient policy, political and popular buy-in to the euro as a project for prosperity, stability and global governance. Member states did not see their voluntary sacrifice of monetary policy as a reason to heighten their collective engagement in those areas where they are the key actors— fiscal policy, employment and structural reform. Instead of balancing a deliberate loss of sovereignty in monetary policy with enhanced collective action on economic policy, they were inclined to balance it with assertions of sovereignty in the economic area.
 
In Ireland, once membership of the euro was achieved in 1999, there would seem to have been less, rather than more, recognition and acceptance of the disciplines inherent in a single currency.
 
Consequently, the future effectiveness of the single currency will depend on a higher degree political and popular identification with the euro and understanding of the disciplines and responsibilities inherent in membership. In the first instance, this requires that the member states and the EU institutions are seen to address the challenges facing the euro and the European economy. But building this shared understanding is a task for all economic and social groups who accept the euro as the context within which their goals must be pursued. They need to affirm the appropriateness of euro-area and EU-level mutual surveillance, benchmarking and learning.
 
The process of reform and policy correction at EU and national level is far fromcomplete. But the task set - to protect the euro, address the deficit and debt problems of member states, support macroeconomic recovery and sustainable growth, and address the risk of further financial sector turbulence—is worthwhile. Ireland’s interest lies in this reform process being open enough to address all the problems as they arise and moving to a successful resolution.