Ireland: The Outlier Inside

Abstract

Abstract Ireland inhabits a unique position within the Euro Area. It is an outlier in almost every relevant respect, being the sole liberal market economy within the Euro Area, the most distant geographically of the Northern European members from the heart of the Euro Area, the most heavily dependent in terms of trade and investment on non-Euro Area economies (in particular the UK and the USA), and one of only three members that are not part of the continental land mass. Partly as a consequence, its business cycle (at least on entry) was not at all closely aligned with that of the core Euro Area economies, and, owing to its trade dependence on the Anglophone economies in particular, its economy was characterized by relatively low levels of intra-industry Euro-Area trade. On the face of it, it had less to gain from Euro-Area membership than other prospective participants in EMU. The relative size of the anticipated microeconomic advantages— principally, reduced transactions costs, more effective price signalling mechanisms and the elimination of exchange rate uncertainty with its Euro Area trading partners—was always likely to be less than for other member states. And, in macroeconomic terms, it arguably had much to lose— in adapting itself to a sub-optimal interest rate setting and to the loss of competitiveness in key export markets that might arise from an appreciating currency.