Ireland is being bullied by Euro-zone countries to act in their best interests rather than its own:
• Portugal's finance minister urges Ireland “to do the right thing for the euro and accept a bail-out”;
• Spain’s finance minister tells Ireland to make the “proper decision”; and
• Angela Merkel can’t decide whether to protect German banks, who have over-lent to Ireland, or German taxpayers who would fund a bail out.
Ireland though will act in its own interests - and it has a better option than the two that were open to Greece. The Greeks had to do what they were told by the Germans, or re-establish the drachma.
In the long-term it might be best for Greece to go its own way. In the short-term though the costs of inflation, default and exclusion from the international capital markets would be high, and would only partially be offset by an inflow of bargain hunting tourists.
Unlike Greece, Ireland would not need to re-establish an independent currency, with all the short-term difficulties that would entail. Ireland could simply rejoin sterling and have a monetary policy more suited for Irish needs.
Germany’s Irish loans could be deemed to have been made in sterling, so as to provide a fair return but allow Ireland to start exporting its way back to growth. We would benefit from closer relations with Ireland and keep the spur of Irish tax competition which the EU would snuff out.
Every MP I have spoken to says they would be happy for Ireland to have a guaranteed seat on the Bank of England’s monetary policy committee. This would mean that, unlike before 1979, Ireland as a sovereign country would have a proper say in setting sterling interest rates.
When we raised the idea with David Liddington, our Europe minister, at the Conservative Foreign Affairs Committee yesterday he was positive, if Ireland wants to explore this option. I know the Chancellor will want to help Ireland stand up to bullying at ECOFIN today.
What better way than to let them know they can come back to sterling if the euro isn’t working for them?