The EEC bonanza
The EMS would provide currency stability. Further loans or grants are a bonus.
For just over 150 yeats now, Ireland's monetary system has been totally integrated with Britain's. This connsequence of the 1807 Act of Union was not undone by independence.
Ireland's monetary union with Britain has been lopsided with the burrden of maintaining it fully on Irish shoulders. Our Central Bank has to maintain sufficient funds in London to ensure the parity Iink. This meant that all our external reserves were held in sterling. This cost us dearly as the value of the pound plummeted during and after the Second World War and more recently in the late sixties and early seventies.
Britain never used its reserves to suppport the Irish Punt and regarded moneetary union as a grat;uitous concession to allow Ireland to export agricultural goods to the UK at prices which kept the Irish farmers on their knees.
Now we are in the EEC and receive aid from the Community worth £400 million annually. Under the proposed European Monetary System, the EEC will make £ 17 billion available in order to support member currencies in temmporary difficulties, and thereby ensure currency stability. Any further grants or loans are a bonus.
The principle objective of the EMS is to create currency stability. This basicallly means that the international value of anyone country's currency should be reasonably certain and if it does vary it should do so in a predictable way within reasonably narrow limits. Ireland's recent economic history has been so bedevilled by the plummeting value of sterling that the opportunity to join the EMS offers us a chance to untie ourrselves from Britain's apron strings.
In the era after World War II there were twenty years of fairly stable innternational currencies. The arrangement reached after the war, the Bretton Woods Agreement, which set up the International Monetary Fund (IMF), worked well between the more indusstrialised countries but hinged entirely on. the American dollar, which in turn was linked to gold at a fixed price of 35 dollars an ounce.
By being linked to the dollar, all other currencies were thus indirectly linked to gold. In effect, Bretton Woods set up a quasi-gold standard system not dissimilar to the pure gold standard in which Churchill had so much faith in the twenties. The big innovation was the creation of the IMF, which supervised the system, and in times of temporary crisis, like a run on a currency, used its reserves to support it.
The first real chink in this system came in the late sixties when the world was awash with American dollars. To prevent Central Banks cashing in dollars for gold, the US raised the gold price to 42 dollars an ounce. This did not work, so the US then put artificial restrictions on dollar encashments. The dollar was eventually forced off the gold exchange standard and left to float. The final push..was given to the whole system by the'oil crisis in October '73. Ever since then, international currencies have beecome increasingly unstable, and the recent collapse of the dollar has brought the system's problems to a head.
The fact that the proposed European Monetary System is only a monetary union and not a full economic integraation has significant implications. In a monetary union, all that happens is that countries agree to co-operate to ensure a reasonably stable relationship between their currencies. Each country must still look after its own internal economy and be responsible for ensuring a reasonable level of, for example, balance of payyments and internal inflation. In turn, the Europeam Monetary Fund (EMF) would be prepared to support a member country's curren cy , if it ever came under pressure, to ensure that it stayed within the agreed 2'12 per cent band of fluctuations.
Asmall country like Ireland with an independent currency could very easily be swamped by the massive funds flowing around in the international money market. It would be very easy for a slight run on the Irish pound to turn into a stampede. Ireland would not have the reserves to cope with such a situation and its only way out would be to allow the punt to be devalued signiificantly. Or, and this is probably an even Worse alternative, the Government could intervene directly in the market through exchange control mechanisms.
This is the sort of system there is in European countries, where the interrnational value of these countries' currrencies is determined arbitrarily by the Government. These values are totally out of line with reality, but the Governnment can sustain the fictions simply by refusing to allow their currency to be dealt in freely. Thus, in Moscow, for example, if you sell dollars or marks on the black market you can get four or five times the official currency exchange rate. Nobody is seriously suggesting we resort to this expedient.
Given these circumstances, it is clearrly advantageous for Ireland to be a memmber of the EMS. The direct benefit is that if there is a run on the punt membership in the EMS would ensure that EMS funds are used to support it within its agreed value band. But if there was excessive inflation in the economy; the Government would have no choice but to devalue the punt in phased steps in agreement with the EMF. The EMF would thus act almost exactly on the same lines as the Interrnational Monetary Fund (IMF).
Ireland would really benefit if Europe's economies were to be totally integrated. Leaving out the quesstion as to whether this would be posssible without parallel political integraation, the benefits to poorer countries like Ireland would be phenomenal, as spelled out in the McFadden Report. Each country in this system would then become almost like a state in the USA. This would, of course, take control of the Irish economy out of the Governnment's hands, leaving it to act more like a local authority, dealing only with the smaller aspects of the economy.
Compensation for this reduction in national autonomy would be massive innter-regional transfers through social welfare payments with, for example, unnemployment and pension benefits deterrmined by the cost of living in the richer areas. As the bulk of public revenue raised through taxes would be raised in the richer areas, the flow would mainly be that of tax revenue raised in the richer parts going to welfare benefits to the poorer parts.
Northern Ireland is an example of how a poorer region in a larger single economic area, namely the United Kinggdom, benefits. The net effect of Ulster's integration with the UK is the transfer of £600 million a year representing almost one quarter of Northern Ireland's gross national product.
Not withstanding all this, Ireland has to face up to realities. At the moment Garret FitzGerald is arguing that for the foreseeable future Ireland needs an ~ annual subsidy of up to £600 million£ from the EEC to allow our participation .e in the EMS. For the Oovernment.j' George Colley is arguing that what we 1! need is £650 million to cover us for therrnext five years while the country adjusts to the discipline imposed as a result of membership in the EMS supersnake. Colley's figure would be the equivalent of 1 Yz per cent of our GNP over the next five years, whereas Garret FitzzGerald is working on the basis of a conntinuing annual subsidy in the order of 5 per cent.
Membership of the EMS, however, has to be seen in the context of an existing membership in the EEC. This means that any resource transfer Ireland now applies for is over and above the existing benefits Ireland gets from EEC membership. In a recent paper prepared as part of our EMS application, the Government estimates that the existing resource transfers to Ireland worked out at the phenomenally low figure of 0.3 per cent of gross domestic product. These figures are a bit dated as they are worked on 1976 statistics, but nevertheeless do give an indication of where Ireeland presently stands. Even if the figures were updated to the likely 1978 income, the calculation would not likely be that much higher.
This figure is so low as to question its validity. The method used by the Government to reach it was a rather simple one. All it did was add up the payments to Ireland under the EEC's social and regional funds and substract from this Ireland's annual contribution to the Community. The common agriicultural policy was excluded from the calculation on the basis that money flows to Ireland through the Market mechanism of the CAP do not constitute a resource transfer. This is someewhat unreal and the Government impliicitly recognised this when it goes on to argue that although Ireland may benefit under the agricultural policy it has suffered very heavily in industry.
But even this latter argument is rather facetious for since the first proogramme for Economic Development back in 1959 Ireland has accepted a's part of its industrial policy, that indusstrial expansion must be associated with free trade on the basis that it is only through free trade that exporting indusstries can flourish. It is clear that the vast bulk of foreign industrialists who have set up in Ireland have only done so on the basis of Ireland's continuing memmbership of the EEC, with the free access to these markets that this give them.
But it is under the Common Agriicultural Policy where all of Ireland's major gains have come as a member of the EEC. In a recent paper read to the Dublin Economics Workshop down in Renvyle House in Connemara, the Trinity economist, Alan Matthews, preesented a paper on the "Income Transfer Effect of the Common Agricultural Policy for Ireland". The basis from which he worked was the differential income effect between the value of all agricultural commodities traded exterrnally by Ireland based on the prices received under CAP and those that would have been received if Ireland had to depend on world agricultural prices.
From his calculations he worked out that Ireland's farmers are better off to the tune of £718 million. The bulk of this, however, is paid for by domestic Irish consumers through higher internal prices for food goods and by higher prices on agricultural imports like wheat and soya beans. Accounting for this, Matthews calculated that Ireland was better off to the tune of £275 million as a member of the EEC.
Updated to the current year, Ireland is presently a net beneficiary under the Common Agricultural Policy of almost £350 million. Adding on the benefits received under the EEC's Social and Regional Funds, Ireland has gained a further £50 million. Assuming that the damage done to domestic industries is more than offset by the industrial growth that has occurred simply beecause Ireland has access to the EEC markets, Ireland can thus seem to be a net beneficiary of around £400 million a year as a result of being a member of the EEC.
To suggest that Ireland's membership of the EEC has created anything other than massive gains is totally dissingenuous even if all of these and more have gone to the farmers as a result of Irish consumers having to pay more for their food. Urban dwellers can rightly complain about this but they should direct their ire not against the EEC, but rather against our own Government for it is up to the latter to determine how national income should be distributed. At current prices, Ireland's farmers are better off by over £800 million whereas the country has only gained around £400 million a year as a member of the EEC. As farmers have gained more than twice the country's total gains, memberrship of the EEC has involved an internal resource transfer from the town to the farmers of a massive £400 million a year on top of the EEC's £400 million conntribution. It is disgraceful that the Government did not spread out these gains more fairly. The very least it could have done was immediately make all farmers subject to tax, as well as posssibly imposing a land tax. This latter is something that Seamus Sheehy sugggests is something that should be done anway simply to ensure the maximum utilisation of land resources.
It seems senseless to argue against the European Monetary System and the currency stability it aims at. This does not mean that there are no disadvanntages, but basically all these are short term and arise almost exclusively beecause of Ireland's existing monetary union with sterling. These disadvantages are all of a short term nature and arise because of the existing trends in the Irish economy like leapfrogging inncreases, and existing inflation. Neither of these will be possible in the EMS for it follows from currency stability that internal price rises and wage increases, the things that determine the external value of the punt, are moderate and basically only reflect real increases in output with only 2 per cent or 3 per cent changes to cover internal irregulaarities.
Courage will be needed to break the inflation psychosis forced on Ireland through the sterling link. The Irish trade unions however have inflation so inngrained into their bargaining system that George Colley and Martin O'Donoghue will have some task to convince them of the wrongness of their ways with Ireeland in the EMS. It may need a wage and price freeze to bring this home and this would be worth it for inflation does no one. any good. Without it there are very tangible advantages like low innterest rates, which would mean, for example, that the repayments on a £20,000 house mortgage would sink from the current level of £250 a month to a German typerno nthly rate of £120 a month .•