Andrew Lilico: Further thoughts on a Currency Union with Ireland

On Wednesday I asked whether, in the event of an Irish referendum on staying in the euro, the British government should clarify that, in the event the Irish did decide to leave, a currency union with Sterling might be available - as was the case until the 1970s.  In the light of the comments, I had some remarks.

First, some commenters said we should not "interfere" in the democratic decisions of other states.  But the British government does not have a neutral position with regards to the euro.  Its position is that the euro Members have a duty to ensure that it does not break up, that to achieve that there should be fiscal union, and the Prime Minister has even urged that Germany agree to guarantee or pay the debts of Italy and other Eurozone Members - stating in the House of Commons that he couldn't understand the reluctance of Germans to do so.

So if there were an Irish referendum, as matters stand, the British position would not be neutral.  As matters stand, our official position amounts to urging the Irish to vote Yes.  But there will certainly be a No campaign in Ireland.  Some parts of that No campaign may urge Irish voters to vote No, understanding that that would mean Irish withdrawal from the euro, but claim that that would not necessarily mean a return to an Irish-only currency, as Ireland would have the option of entering into a currency union with Britain - as was the case in the recent past.  If parts of the Irish No campaign do indeed claim that, the British government will face the decision of whether to persist with its official line implicitly (near-explicitly) urging Irish voters to vote Yes, or whether to nuance that position, saying something like "Our position is that this is a decision for the Irish people.  We would welcome a Yes vote as assisting the integrity of the euro, but we do clarify, for the sake of balance, that in the event of a No vote the No campaign is correct, in principle, that we might consider entering into a currency union with a post-euro Ireland."

Indeed, I put it to readers that that would be a more neutral, less "interfering in other nations' affairs" position than our current one.

Second, some urge that no currency union can succeed without political union.  Well, it's certainly the case that the euro could not succeed without political union, because it could not be stable without large fiscal transfers of the sort that would require political legitimacy (and indeed, contrary to billing, the EU always has had fairly significant fiscal transfers - currently amounting to about €58bn per year of structural and cohesion funds).  But, on the other hand, recent decades have seen currency unions between Belgium and Luxembourg, and between Ireland and Britain, and between Britain and New Zealand, none of which involved full-blown political union.  These arrangements could function without large fiscal transfers because of deep economic linkages and long-standing cultural linkages (e.g. common languages) that allowed for high labour mobility particular of the native populations of the smaller economic unit to and from the larger.  That meant that asymmetric economic shocks (shocks that affected the larger unit differently from the smaller) could be absorbed by labour mobility (e.g. Irish workers coming to Britain when there was a slump in Ireland, and moving back to Ireland when there was a boom).  (It was precisely the lack of such labour mobility within the Eurozone that was one of the key reasons it needs large fiscal transfers to succeed.)

Third, some commenters urged that the Irish would never contemplate such a move.  I'm not sure why it would seem so much more inconceivable than simply leaving the Eurozone (and hence, probably, EU) and operating alone - something many people do think conceivable.  Ireland can be seen as having gained greatly out of EU membership.  It may well choose to stay in the Eurozone, and become a full-blooded part of the Single European State (and good luck to it if it does).  But if it does leave, it will face some choices.  The reality was that it was not a coincidence that Ireland joined the EEC at the same time as Britain in the 1970s - economic linkages were deep then.  They remain deep today (if not quite as deep, relative to other linkages).  Irish republicans did not, in the past, regard membership of the currency union with the UK as incompatible with Irish independence.  Why would they now?  And even if it were, wouldn't that doubly imply that membership of the euro is incompatible with Irish independence?  So the choice might not be Irish independence versus membership of a currency union with Sterling.  It might be Irish subsumption into the Single European State versus Irish subsumption into a British Isles with an independent Scotland, and independent Ireland and (who knows, at that point?) an independent Ulster.

I do not raise this question idly or as a piece of mischief-making.  If there is an Irish referendum, the British government will have to make a choice: does it persist with its current policy stance - which amounts to urging the Irish people to vote Yes - or would it indicate a more neutral position that accepted that options such as a currency union might be explored in the perfectly plausible event that the Irish people vote No.