Ireland is being asked to vote to take part in the Eurozone Fiscal Compact. Is this the medicine that Ireland needs to fix its broken economy?
The Fiscal Compact is designed to reign in governments that spend too much, tax too little and run deficits over the whole economic cycle leading to unsustainable sovereign debt and the need for bailouts.
The compact is designed to turn the whole of Europe into Germany. It ignores the fact that even Germany hasn't been acting like Germany over the last decade.
Is this the right medicine for Ireland? Would the compact have saved Ireland from its current economic maladies?
Lets look at the economic history of Ireland before and after joining the Euro.
GDP growthIreland was growing fast before the Euro was introduced in 2000. It actually slowed down after the Euro was adopted, so the Euro was not the reason for the Irish economic miracle.
Ireland consistently out performed Germany in the period up to the financial crash. At times Greece grew as fast as Ireland, but overall the Irish economy grew faster and probably had the best economic record in the whole of Europe up until the financial crash.
GDP per headThe Irish people grew richer throughout the period until the financial crash in 2007. They overtook German and the UK in dollar terms around 1999 and remain richer today. The British also became richer than Germans around 1999, but then lost that advantage because of the effects of Gordon Brown's Great Recession.
UnemploymentIreland started out with high unemployment in the early 1990s, but unemployment fell fast from 1994 to 2000. Unemployment remained low until the financial crisis, but low unemployment was not a result of joining the Euro - it happened well before that.
So how did Ireland achieve this economic miracle? Through hard work!
TradeIreland achieved fast growth through trade, not through government spending.
People like to talk about Germany being the power house of Europe, but Ireland does twice as much trade as Germany. The only reason why Germany is the engine of Europe is that it is the biggest economy, not because it is the best economy.
Savings rateIreland also had a consistently high savings rate until the financial collapse. That too had nothing to do with the Euro.
TaxationIreland managed to outperform Germany with lower taxes. If you don't take all of the money to fund an over large public sector then you can leave more for the private sector, which creates faster growth and allows you to spend more on public services.
Ireland is proof that the European model of an over generous welfare state does not make people better off.
The Fiscal Compact deals with government borrowing and total government debt. Was that a problem for Ireland?
National debtIreland's national debt as a percentage of GDP fell below the Euro area target of 60% in 1998 and continued falling up until the financial crisis.
That means that Ireland was running a budget surplus, not a budget deficit.
The Fiscal Compact would not have applied to Ireland in the decade since the Euro was introduced. It would have applied to Germany though, because Germany ran too high a deficit. Now Germany are trying to label Ireland as part of the fiscally irresponsible Euro fringe.
So what went wrong in Ireland? Two words: the Euro.
Private sector lendingLending to the public sector started growing around 1994 as Ireland recovered from an earlier recession. It rose until 2002 then rocketed as the housing boom took off, reaching over 200% of GDP as the financial crisis hit.
This was mainly a result of an asset price boom, with house prices growing way too high which leading to too much house building and even more borrowing.
The problem with a single currency is that interest rates are set for the whole Eurozone, not for the needs of a small economy like Ireland. When Ireland needed to have higher interest rates to cool a booming housing market they couldn't get them because interest rates were set by the ECB.
The Irish government ran a very good fiscal policy in this period, but the private sector borrowed too much and created a massive boom. That was down to the Eurozone running monetary policy which was very bad for Ireland.
So does Ireland need the Fiscal Compact? Is that the right medicine for Ireland's economic ills?
Well, no. The Fiscal Compact is all about government spending, taxation and budgetary discipline. Ireland was running a budget surplus and had a total debt below the Eurozone target. The Fiscal Compact would not have helped to prevent the Irish financial crisis.
When the crisis hit, the Irish government started running a deficit, borrowing went up above the Fiscal Compact limits and government debt went above the debt limits too.
The Fiscal Compact would not have prevented Ireland's financial collapse, but it would have stopped the Irish government dealing with it.
The Fiscal Compact is not only the wrong medicine for Ireland, it is bad medicine for Ireland. It would not have prevented the patient getting sick, it would have stopped the doctor making him better.
In fact, the Fiscal Compact would have been poison had it been in effect when Ireland's financial crisis hit. It could have stopped the Irish government saving the banks, leading to runs on the banks by depositors desperate to get their money out, multiple bankruptcies and empty ATMs. In fact, it could have led to a total breakdown of the banking system. Not only that, but it could have also stopped Ireland increasing spending to deal with the aftermath of that collapse, meaning no unemployment benefits for the millions who lost their jobs.
Germany is trying to make Ireland and the rest of the Eurozone more like Germany. Instead, they should be making the Eurozone more like Ireland.
The causes of Ireland's financial crisis was the Euro and too low interest rates. The solution is to leave the Euro, not adopt a Fiscal Compact that was designed for Greece.
Clearly, the right answer for the Irish people is to vote NO in the referendum.
