Culture changes lead new euro economy.
Following our Accountancy Age Euro Focus issue, David Harvey and
Following our Accountancy Age Euro Focus issue, David Harvey and
While Britain has assumed a wait and see attitude to adopting the euro, the UK’s western neighbour Ireland joined up in the first batch.
Ireland is a more wholeheartedly EU member than the UK. It has benefited directly from its membership of the European Union and the philosophical approach of the Irish people and successive governments has encouraged a European dimension to Irish lives.
Economically, Ireland suffered badly in the years prior to enlisting in the EU in 1973. But it has responded vigorously to the large tranches of euro cash that it secured to update and remodel the Irish economy.
Dublin is now a thriving financial centre and one of the most cosmopolitan cities anywhere in Europe. It has become a tourist attraction, especially for young people, and property prices are among the most buoyant in Western Europe.
In signing up for the euro, Ireland’s economists were concerned that over-heating could be a problem. The traditional remedy would be to hike up interest rates until the period of heightened excitement had calmed.
But since Ireland gave up the right to fix its own rates as part of the deal, there were genuine worries that inflation could soar.
The decision to enter the European Single Currency at the first opportunity last year was entirely political. It seemed a sensible decision to bring the country into the heart of the European Union, linking its economy more closely with other European countries and taking advantage of the benefits that were promised from Brussels.
Eighteen months on, with inflation running at over double the EU average, low interest rates and a high growth rate which seems to be in divergence from its euro-neighbours, there is much discussion as to whether entry into the EMU has been such a good step for Ireland after all.
According to Finn Gallen at the Industrial Development Agency (IDA), there is no gain without pain and, although there are some difficulties within the Irish economy, many of them are not related to the euro. Indeed, he points out that there would probably have been more problems on the outside.
‘Although there has been no big surge in inward investment since our entry into EMU, it should make us more attractive in the long run.’
He adds that there are 1279 foreign companies in the agency’s portfolio which have expanded into the country – more than 1,400 foreign corporate investors in Ireland altogether, accounting for 35 per cent of GDP. Entry into the single currency has made the Irish economic landscape more appealing, especially for US companies who want a foothold in Europe.
The ramifications of higher inward investment into the country are enormous, with increased economic activity, especially in the regions where the multinationals are operating. Not only are there opportunities for local suppliers, but also increased employment opportunities.
This can, of course, bring problems with spiralling house prices and high inflation as well as a skills shortage in some areas of the economy.
But as Niall O’Sullivan, an economist at The Bank of Ireland, points out: ‘The high inflation rate is partly due to some one-off factors, including an increase in tobacco duties in the last budget as well as higher oil prices.’
He adds that, with tax receipts buoyant, there is scope for the government to put money back into the economy and help the infrastructure of the country catch up with surging inward investment – and it has duly already announced a billion pound programme of construction and development, including new roads and improved public transport.
If Ireland’s entry into the single European currency makes it more attractive to foreign companies wishing to gain a presence in Europe, this can only help the Irish economy diversify beyond its traditional markets and open up trade further afield. Although commitment to the euro in Ireland remains strong, there are now more voices who are now speaking of dissent.
Senator Shane Ross, also business editor of the Sunday Independent, says: ‘I was in a minority of one when Ireland went in. The trade unions, the employers confederation, the media, the government and the civil servants all took the view that we have benefited from being Europeans so we should adopt the euro.
‘There was a general assumption that the euro would be a strong currency and only a handful of people said that we should not make that assumption.’ He adds prices have risen rapidly, fuelled especially by mortgage and house price inflation. ‘We expect to see interest rates up at seven per cent by the end of this year and we have no way of containing this growth.
‘The government will ask businesses to keep a cap on prices but the finance minister has already said that his commitment to reduce taxes remains in place. Our inflation rate is already twice what it is in the other countries which have adopted the euro.
‘Most of these countries trade among themselves whereas half of our trade is with the UK and the US. So we are importing inflation. This concept is unknown in the rest of euro Europe.’
Some argue that those who are taking longer to decide, such as the UK and Denmark, may be left out in the cold and wishing that they had accepted the invitation in the first place.
Yet the party is taking some time to get going for the members of EMU.
Ultimately, says Finn Gallon, as with the advent of the single market in 1973, nothing happens immediately and only time will tell whether Ireland’s entry into the euro has had a positive long-term effect.
THE EURO HAND-OVER IN 2002
Banks in Europe will get their supplies of coins and notes in the new euro up to three months before the currency goes live on 1 January 2002, writes Gavin Hinks.
The European Central Bank revealed last week how it was planning to handle the ‘smooth’ hand over to the euro from all the national currencies that will become defunct.
Institutions will pay for their new euro cash holdings in three settlements throughout January of 2002. Banks will be able to take the cash from September to 31 December 2001 without providing collateral. Credit institutions like the banks will have to cover the risk of destruction, theft or robbery of the cash holdings themselves.
However, the institutions have now been given three extra months in which to exchange all their cash holdings.
Instead of doing it all by the last day of 2001, the banks now have until 31 March 2002.