THIS ARTICLE APPEARED IN SUNDAY BUSINESS POST ONLINE AUGUST 14th 2014
The lack of understanding of some people regarding the implications of the decision we made to join the euro back in 1999 continues to astound. There was never any real understanding, amongst the political elites at least, about the implications for a very small economy of joining a monetary union. This was subsequently played out to devastating effect as respective governments pursued a fiscal policy that was totally inappropriate for an economy that was enduring a totally inappropriate monetary policy. The result was a total implosion of the economy and we are still struggling to pick up the pieces.
This week we had a couple of MEPs and others expressing disquiet at the changes to the ECB voting structure that will come into force next January when Lithuania becomes the 19th country to join the system. Ireland will lose some of its influence around the ECB table, or so the argument goes. The issue of course is that this was inevitable since the early days of the artificial monetary construct, but of course the bigger question is if Ireland ever had any real influence around the ECB table in the first place.
Under the rotation system, the member countries will be divided into groups according to the size of their economies and their financial systems. The governors of the five largest countries – Germany, France, Italy, Spain and the Netherlands – will share 4 voting rights between them. the other 14, including Ireland, will share 11 voting rights. The governors of the member central banks will subsequently take turns using the voting rights on a monthly basis.
The objective is to ensure that the decision making process does not become too unwieldy, which does make a lot of sense. All members of the governing Council will attend each meeting and will be able to contribute, but not all will be able to vote every month. The six-member executive Board will have permanent votes.
To suggest that this change to a rotation system is akin to the Irish government ‘sleepwalking’ into the loss of voting rights is total baloney. While the smaller countries will loss disproportionate voting rights, it has always been the case that the larger countries basically dictated policy. It would be extremely naive to believe that the ECB ever set interest rates to suit a tiny country such as Ireland regardless of its cyclical economic situation. Policy has to be set to suit the larger economies. That is the reality of a monetary union and it is up to the smaller countries who may end up with an inappropriate level of interest rates to use the policies that they still have some control over to guide their economies. A number of countries, most notably Ireland, blatantly failed to do that from 1999 onwards. There is an old saying that ‘if one enlists, then one has to march’. There is no point in crying over spilt milk now.
It would be instructive for those who are criticising the imminent move to a rotation system at the ECB to look at what happens in the US with the Federal Reserve. The Federal reserve system consists of 12 regional Federal Reserve Banks, and a permanent Board of Governors in Washington DC. Within the Federal Reserve the Federal Open Market Committee (FOMC) sets interest rate policy for the 50 states of the US. The FOMC is made of a Board of Governors consisting of seven members, who hold permanent voting rights; the president of the Federal Reserve Bank of New York who has a permanent vote; and 4 rotating regional Fed presidents. the presidents in Chicago and Cleveland vote every second year , and the presidents of the other 9 Feds vote every third year. This system of rotation is deemed flexible enough to deal with the task of setting interest rates for such a large and diversified economic block.
Based on how the US system works, it is hard to see what some of our MEPs are complaining about. Perhaps it is just a case of making some noise to remind the electorate at home that they actually exist.
Within the EMU structure, Ireland is a bit player without any real clout; a fact that should be apparent from our inability to negotiate any sort of deal on our re-capitalised banks. It is only going to get worse. As the euro area continues to expand, further dilution will occur. There’s not a lot we can do about it.