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Financial Times March 29, 2012 7:53

Ireland must vote for an end to its humiliation

in Europe

By Michael OSullivan

In Frank OConnors story The Masculine Principle a bachelor squirrels away his savings in succourof a woman who scorns and humiliates him. Irelands relationship with Brussels (or rather Frankfurt)has strong parallels with this tale. Ireland is enduring a long and painful ordeal in order to keep alivethe prospect that the eurozone will carry us to a more prosperous future. The risk is that the Europeanproject as a whole and the eurozone structure in particular will destroy, rather than save us. That is,unless we try to redeem and change them.

The referendum on May 31 must address the kind of Europe we want and how we intend to engagewith it without feeding into the efforts of those who want us to abandon it.

Our new relationship with Brussels should be intellectually independent and without the passivity thathas too often defined ties to the European Union. It should be proactive and fully consider Irishinterests. The tendency in the past was to take the structures, standards and policies that were handeddown to us, without questioning their appropriateness.

Common monetary policy is the case in point. No correcting mechanism was put in place to takeaccount of the fact that measures decided in Frankfurt could at times be too hot or too cold for thesmaller economies. So, what a country such as Ireland requires is clever and flexible use of fiscalpolicy to offset common monetary policy.

Yet the proposed fiscal compact will do the opposite. It will tie both policymaking hands behind ourbacks. The popular delusion that the fiscal compact is a cure for our economic problems is a fantasy

that needs demolishing.

Austerity as an economic tonic works best when the country administering it has its own currency andinterest rates, when neighbouring economies are relatively healthy and where a credibility gap can beclosed by some stringent policymaking. Ireland in the late 1980s is a good example.

Austerity does not work when applied over four or more years to countries that do not have sovereigntyover monetary policy, that endure broken banking systems, whose households are in the grip of asevere economic shock and whose neighbouring economies are also weak. Ireland,Spain, Greece,Portugal and possibly even France are examples.

By bowing its head and accepting the apparent wisdom of austerity, Ireland has not questioned theappropriateness of the eurozone as an economic structure. The danger is that the passage of the fiscalcompact will draw a shroud over the eurozones shortcomings and halt attempts to improve theframework.

This is already happening. The restructuring of Greeces debt took some pressure off policy makers,who are now delaying vital discussions on Europes financial architecture.

Yet the crisis is by no means over. As John Maynard Keynes argued in The Economic Consequences ofthe Peace, the acts that apparently brought closure to one crisis sowed the seeds of greater economic,social and political turmoil.

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So what should a small country such as Ireland do? Our approach to Europe must change. We shouldbe less inclined to regard it as a source of easy capital and more questioning about how it is run. Weshould use the goodwill Ireland has amassed and the opportunity of the referendum to focus the debateon the deficiencies of the eurozone structure as it stands.

There is a long list of possible remedies, such as a super finance ministry with the authority of the USTreasury, a more growth-oriented mandate for the European Central Bank, a credible exit process for

recalcitrant states, a eurozone debt agency and the issuance of eurozone bonds by other institutions.

There must also be more focus on growth and less on austerity. It is remarkable how policy makers sorarely seek to place Europe in the context of the global economy and how apparently unaware they areof the competitive threat from Asia and other emerging economies. Growth as an objective is given lipservice.

To advance the European project the fallacy of austerity as the cure to the crisis must be understood.The real problem is that the underlying monetary framework is adolescent and needs to evolve. This isa reality that smaller countries such as Ireland cannot afford to avoid, and they must speak up now.

The writer is author of Ireland and the Global Question

Copyright The Financial Times Limited 2012.

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