02/05/2023

DISCUSS THE RATIONALE FOR IRELAND’S DECISION TO JOIN THE EUROPEAN

MONETARY SYSTEM IN 1979.

Presented by: Seamus Burke G00301820

Presentation Schedule:Introduction What is the EMS Setting up the EMS Ireland Pre EMS

Main Body Reasons that lead to Ireland joining the EMS

Conclusion Overview of presentation

What was the European Monetary

System in 1979?

A system adopted by European Community members with the aim of promoting stability by limiting exchange-rate fluctuations.

Set up following an initiative by the EU President Roy Jenkins in 1978

Belgium Denmark France Federal Republic of Germany Greece Ireland Italy Luxembourg The Netherlands United Kingdom

The United Kingdom is a member of the EMS, but does not participate in the intervention arrangements.

At the Copenhagen Summit, on 7 and 8 April 1978, Valéry Giscard d'Estaing and Helmut Schmidt revived the idea of a new European Monetary System (EMS), open to all the EEC Member States.

the Bremen European Council endorsed the principle of the EMS on 7 July 1978. The EEC institutions and the Finance Ministers of the nine Member States were immediately instructed to draw up detailed proposals that were later adopted formally by the Brussels European Council on 5 and 6 December 1978.

On 13 March 1979, the EMS was born. The United Kingdom did not join the EMS exchange rate mechanism so as to allow the pound sterling to continue to float.

The formation of the European monetary system

The men behind European Monetary System

Helmut Schmidt Valéry Giscard d'Estaing

Roy Jenkins

IRELAND PRE EUROPEAN MONASTERY SYSTEM (STERLING LINK)For over half a century after Independence, Ireland maintained a one-to-one currency

peg with sterling.

• By the end of 1978 Ireland was the only former sterling area country to have maintained an unchanged parity since independence.

• The Irish economy imported the UK`S high and volatile inflation rate.

• The majority of Irelands exports and imports were to and from the UK.

• Sterling took an alarming slide against the US dollar.

IN 1972 AND 1973 STERLING DEPRECIATED SHARPLY AGAINST THE GERMAN MARK.

IN 1975 AND 1976, THOUGH, STERLING FELL STEEPLY AGAINST THE US DOLLAR AS WELL AS THE GERMAN MARK.

LOSING A THIRD OF ITS VALUE IN TERMS OF THE DOLLAR IN LESS THAN TWO YEARSDEPRECIATION OF STERLING WAS NATURALLY ASSOCIATED WITH RAPID INFLATION, AND THIS IN TURN WAS QUICKLY IMPORTED INTO IRELAND.

THE THINKING BEHIND THE BREAK

• Currency link had been the centre of financial strength no longer provided financial stability

• A perception that the long-period of relative economic decline for the UK would continue and would augur poorly for an economy too closely linked with it.

IRELAND’S DECISION TO JOIN THE EUROPEAN

MONETARY SYSTEM IN 1979.

THE EXCHANGE RATE MECHANISM

The European Exchange Rate Mechanism (ERM) was a system introduced by the European Community in March 1979, as part of the European Monetary System(EMS), to reduce exchange rate variability and achieve monetary stability in Europe, in preparation for Economic and Monetary Union and the introduction of a single currency, the euro, which took place on 1 January 1999.

Either you were in the ERM maintaining agreed parities and therefore anchored to German monetary policy and closing in on its low inflation rate: or you applied a different set of monetary policy priorities, your currency depreciated, inflationary pressures accumulated and you left the ERM (Mulhearn and Vane 2008, pp.37).

Note: Low inflation did not follow in the short term ( Leddin and walsh 2013)

Ireland choices once in the ERM

Margins of fluctuations

+2.25%

-2.25%

Central Rate

Cant go below -2.25%

• Each EC currency was allowed to fluctuate within a margin of 2.25 percent around the central rate. A few exceptions to this general rule were Italy, the United Kingdom, and Spain, which were each allowed a larger margin of plus or minus 6 percent (Hamvi and Niroomand, 1995).

Thinking behind joining the EMSo It was decided to join the EMS in order

to anchor the pound to the German mark. From this, it was envisaged that by tracking the German currency, the economic fundamentals enjoyed by Germany such as low inflation could also be tracked by the Irish economy.

o Previous fundamental disasters affecting the UK, such as high inflation; high interest rates; and most importantly, an unstable currency, had pointed to the advantages of adopting closer ties with the more stable German economy.

Ireland's inflation performance during the EMS period was therefore mixed, starting badly and finishing positively. (Kenny and McGettigan's study 1996)

POLITICAL • Fianna Fail lead Government • Underlying Issues with the UK • Republican views. • Didn’t want to be associated with the UK

AND ANY RESIDUAL DESIRE TO STAY TIED TO THE APRON STRINGS OF THE STERLING LINK WAS SWEPT ASIDE WHEN, IN AN EMBARRASSING AND IRRITATING DIPLOMATIC FAUX PAS, BRITISH OFFICIALS FAILED TO INFORM THEIR IRISH COUNTERPARTS OF THE OUTCOME OF SECRET INNER DISCUSSION BETWEEN THE THREE LARGEST EUROPEAN COMMUNITY COUNTRIES. THIS SEEMED TO EXPOSE IRELAND’S PERCEIVED STATUS AS A CLIENT OF BRITAIN (AT LEAST IN FINANCIAL TERMS), A PERCEPTION THAT, FOR REASONS OF NATIONAL PRIDE, HAD TO BE SCOTCHED.(PATRICK HONOHAN AND GAVIN MURPHY 2009)

CONCLUSIONS

Main points

EMS set up in 1979 to steady inflation with aim of promoting stability by limiting exchange-rate fluctuations.

Ireland before the EMS was part of the “Sterling link”Part of the UK

Decision To join the EMS • Exchange rate

mechanism• Polictical

Low inflation did not follow in the short term

QUESTIONS?

BIBLIOGRAPHY:http://www.tara.tcd.ie/xmlui/bitstream/handle/2262/1477/

jssisiVolXXIX_83115.pdf?sequence=1

References Anon, (2015). [online] Available at: https://www.centralbank.ie/paycurr/notescoin/history/Documents/spring8.pdf [Accessed 1 Nov. 2015].

Google Books, (2015). The Irish Economy?past, Present, and Future. [online] Available at: https://books.google.ie/books?

id=wKM51_AMAkkC&pg=PA55&lpg=PA55&dq=why+ireland+joined+the+ems+in+1979&source=bl&ots=vhHzhZZV1c&sig=YMrvW_owxnc7oRjk3FKvyXLtCwE&hl=en&sa=X&ved=0C

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Honohan, P. (2010). Euro Membership and Bank Stability – Friends or Foes? Lessons from Ireland. Comp Econ Stud, 52(2), pp.133-157.

Leddin, A. and Walsh, B. (2013). Macroeconomics. Dublin: Gill & Macmillan.

Tara.tcd.ie, (2015). [online] Available at: http://www.tara.tcd.ie/xmlui/bitstream/handle/2262/1477/jssisiVolXXIX_83115.pdf?sequence=1 [Accessed 8 Oct. 2015].