Irish Central Banker Absolves the Euro of Blame

Currency regimes matter less to the success or failure of economies than the quality of the policies pursued by governments and central banks, the governor of Ireland’s central bank said Tuesday.

In 2010, Ireland became the second eurozone member to need a bailout from the rest of the currency area and the International Monetary Fund, following Greece and preceding Portugal.

 Many Irish people believe the adoption of the euro contributed to the property boom of the early 2000s and the crash that followed from 2007, which destroyed the banking system and led to years of austerity, economic decline and emigration.

They argue that the European Central Bank set interest rates too low for Ireland’s then rapidly growing economy, but just right for Germany, fueling a dangerous explosion in credit. Central Bank of Ireland Gov. Patrick Honohan, who sits on the European Central Bank’s governing council, believes otherwise.

In a speech at Queen’s University, Belfast, Mr. Honohan noted that many countries outside the eurozone suffered banking crises at around the same time as Ireland, including Iceland, Latvia, the U.K. and the U.S., and said that Irish policy makers could and should have done more to retard the credit and property boom.

 “With the Irish economy booming already from 1994 and continuing to grow rapidly after the start of the euro, low interest rates were not exactly what was needed to restrain what was obviously a somewhat overheated economy,” he said.

 “But fiscal policy could have taken the strain—as could macroprudential policies.” Mr. Honohan does allow that the ECB made some mistakes in the years leading up to the crash, in particular by not paying enough attention to the threat posed to the stability of national banking systems by increased capital flows between countries after the euro’s launch.

 “In its enthusiasm for forging an understanding of the euro area as the most relevant policy unit for its actions, the ECB may have gone too far in the other direction of failing to appreciate the dangers posed by intra-euro area capital flows, especially through the banking system,” he said.

 In his speech, Mr. Honohan surveyed almost 200 years of Irish currency arrangements, which have included a long period in which the country used the British pound, and a more recent period in which its currency tracked Germany’s Deutsche mark.

 He concluded that under each regime there have been periods of relative prosperity, as well as periods of crisis and recession.

 “Poor economic policies and bad luck are more reliable determinants of episodes of poor economic performance than choice of exchange rate regime,” he said.

 “Should we not conclude that the choice of exchange rate regime for a country like Ireland is of second-order importance for national welfare relative to the quality of domestic policy choices and implementation?”

 The eurozone continues to face criticism of its design flaws, with outsiders such as Bank of England Gov. Mark Carney arguing it will be incomplete as long as there is no sharing of taxpayers’ funds.

 But Mr. Honohan said the debt and banking problems that have bedevilled the eurozone since late 2009 are largely the fault of national governments, and were avoidable.

 “Sufficient existing national policy tools were available to have enabled the regime to survive its first 16 years without the trauma that has been experienced,” he said.

“All that was needed was disciplined national economic policy, supplemented where necessary by sufficient common surveillance of participating countries’ policies.”

wsj.com