Event Highlights: Ireland and the Euro with Brigid Laffan

February 26th, 2012 in Event Highlights

“Ireland and the Euro” was the title of Wednesday’s luncheon discussion with Professor Brigid Laffan of Ireland, a leading scholar on the European Union, at BU’s Department of International Relations. Laffan, who is principal of the College of Human Sciences and professor of European politics at University College Dublin, is currently is a visiting fellow at the Centre for European Studies at Harvard. Her teaching specialities include European integration, international relations, comparative politics, and Irish public policy. Co-author of a 2008 book titled Ireland and the European Union, she is at work on a new book on the future of the Eurozone from the Irish perspective.

Laffan discussed the Eurozone crisis in general with particular attention to the situation in Ireland. She identified the main causes of the Irish economic crisis, beginning with exogenous factors, namely, membership in the eurozone, which exposed Ireland to cheap credit because of a sudden inflow of “cheap money”, and moving onto endogenous reasons including, a loss of competitiveness, an inflated reliance on the construction industry to sustain the boom, the expansion of public expenditures and weak oversight. According to Laffan, Ireland made an effort to redress the situation as early as 2007, introducing austerity budgets, making painful cuts, attempting to regain competitiveness by taking on sheltered sectors of the economy, and finally, recapitalizing banks and guaranteeing deposits.

She emphasized that Ireland’s problems were not caused by an excess of sovereign debt but rather a banking crisis. On the 28th of September 2008, the then Irish Government guaranteed the vast bulk of bank liabilities without knowing the extent of the toxic assets in those banks. By socialising the liabilities of the banks, the Government undermined its own fiscal standing. Ireland experienced a 21% decline in GDP by 2010 from its peak in 2007. The collapse proved too much for the country to cope with. An outflow of capital, reliance on the ECB for liquidity, and widening spreads made a November 2010 EU-IMF rescue inevitable.

It would be impossible, Laffan said, to overstate the reverberations this has caused. In February 2011, when the Irish electorate was afforded an opportunity to pass judgement on the then Government, it reduced the once dominant ruling political party, Fianna Fáil, to 20 seats in parliament and only one seat in the greater Dublin area.

As for impact of the crisis on relations between Ireland and the EU, so far, a majority (46%) of the Irish electorate believe that Ireland should continue to comply with the terms of the bailout although a sizeable minority (30%) disagree and 20% expressed no view.

For the time being, Ireland is the best performing of the program countries. Competitiveness and growth have returned thanks to booming export sector and a reduction in unit labour costs. However, unemployment is rising, emigration has accelerated and the domestic economy continues to decline. If the bailout strategy does not work in Ireland, Laffan stated, it will not work in the other peripheral countries.

One aim of the EU-IMF rescue plan was to contain the threat of contagion spreading to other eurozone countries. Another goal was to give the Irish authorities breathing space to introduce reforms, regaining competitiveness and paving the way for a return to the debt markets in 2012.

According to Laffan, it is not in Ireland’s interests to default given its reliance on inward investment and exports. As long as the situation in Europe remains unstable, the Irish Government has to navigate the pressures emanating from two sides. Just how long any Government can manage sustained austerity is difficult to judge. There may well be a tipping point into social unrest but so far, the Irish Government, economy and society have displayed considerable resilience.

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