In The Long Run We Are All Dead

May 2015 saw the Irish people give their resounding approval for same-sex marriage legislation. Yes, the 34th amendment to our constitution is, to many of us, a wonderful achievement. However, perhaps it is worth casting our minds back to May 2012. In that month the Irish people gave an almost equally resounding yes to the Fiscal Compact, more formally known as the “Treaty on Stability, Coordination and Governance in the Economic and Monetary Union” act, 2012, This amendment signed Ireland up to an EU commitment. A budget commitment.

The Fiscal Compact demands that Ireland adhere to balanced budgets, for now and forever. What this requires is for Ireland to run budget deficits of less than 3% in any one year, and of less than 0.5% over the medium term (referred to as a structural deficit).

You might well wonder why any of this matters, but it does, immensely. Upon entering into the single currency, Ireland gave up it’s monetary policy to the European Central Bank, that is, the power to control the money supply via interest rates. Exchange rate policy was handed over at the same time, as we were entering a fixed exchange rate. This, combined with the Fiscal Compact, leaves Ireland in a precarious position. We stand now with no monetary policy, and little, if any, fiscal policy.

Once the recession becomes a faint memory, and the interfering Troika seem are recalled as only a vague nightmare, we will awake from our slumber to find that while the Europeans have gone, the leash they have fastened us to has not. What can any Irish government do in the face of economic problems that are not systemic and symmetric throughout Europe(or at least the big players of Europe)? If Ireland’s economy goes into a slump in a decade, while Europe roars, what is there to do? We may have high interest rates to counter act European inflation, and we may have a strong Euro in light of the interest rate.

In such a situation Ireland’s exports to the UK and US would struggle, tight monetary policy would curb inflation we do not have while worsening unemployment. In a panic perhaps the Irish government will turn to fiscal policy, only to see that the purse is empty, the 3% spent as a result of falling tax receipts and lengthening dole queues.

So where is the release? Perhaps, sadly, in labour mobility. Should an Irish recession not coincide with a European slump, Irish workers will have to emigrate, and those who stay will have to adjust wage expectations down, and do it quickly. Aside from this we can offer up a prayer that whatever unforeseen economic shock strikes Ireland in the future, may it hit Germany too.