The Irish punt on its own
Irish history is littered with anniversaries, of battles won, of warriors slain. But perhaps the country's most significant date in recent history in March 30, 1979, when at precisely 11 a.m. the Irish currency --the punt -- slipped the leash with British sterling and entered the hazardous waters of the international currency market.
For 150 years the punt had maintained parity with sterling. Now as a full-fledged member of the European Monetary System (EMS), the punt was to rise and fall on its own merits.
Until March 30, British bank notes and coins were commonplace in the Irish Republic, and Irish currency circulated freely alongside sterling in Northern Ireland.
On joining the EMS, sterling was gradually withdrawn from circulation in the Irish Republic, and nowadays it is hard to pass over an Irish-minted penny in Northern Ireland (though vending machines do not discriminate).
At first the punt slipped by only a few pence against sterling. But as sterling became a strong oil-backed currency, the Irish punt began to flounder against sterling, dropping in value as much as 30 percent.
So why, when 45 percent of Ireland's trade is with the United Kingdom, did the Irish government decide to launch the punt as an independent currency unit?
The answer is complex and is bound up in political aspirations. One reason must be that true indepedence only comes when a country breaks its financial links with its former controlling power.
Another is that the Irish Republic is much more pro-European -- and thus pro-European Community -- than Britain. In its endeavors to progress toward political and monetary union, the EC regards the creation of an interlinked European Monetary System as a first stage toward ultimate monetary union, presumably with one currency and perhaps even one central bank for the entire Community.
The arguments for an EMS -- put forward forcefully by the West Germans and the French -- are that erratic movements on the foreign exchanges could be avoided if the European countries came together to regulate their currencies. The strong currencies can fend off speculative raids on weak partners.
Britain Prime Minister Margaret Thatcher remains unconvinced. Her advisers point to previous attempts at harnessing European currencies in so-called "snakes." All have failed because the participating countries have been unable to match one another's inflation and interest rates, causing their currencies to rise and fall in relation to each other.
Generally Germany has managed a tight fiscal policy, with low inflation and low interest rates. Italy, Britain, and Ireland have headed the inflation charts. To assuage Irish fears that entry into the EMS would necessitate a reversal in growth and a bout of deflation, the EC agreed to a package of European aid worth L275 million (L here is used for the Irish punt), or $463 million US. Ireland had asked for L650 million ($1.1 billion).
Unfortunately for Ireland, the past two years of the recession have hit the country's open economy extremely seriously, and the punt has fallen from the top of the EMS band of currencies to nearly the bottom.
Government plans to reduce its borrowing requirements in 1980 to L896 million (10.5 percent of gross national product --badly.The debt load rose to a record L 1,217 million (14.5 percent of GNP), caused by a L185 million overshoot on current spending and a big increase in social welfare payments, reflecting a sharp increase in unemployment as industry slimmed down to fight the recession.
And while economists and bankers have urged the government to tighten up its economic policy, it has put off that day because of the imminence of a general election.
Finance Minister Eugene Fitzgerald, setting out his budget proposals for 1981 , expressed his opinion that "borrowing for current purposes must be reduced and on an orderly basis, consistent with the fiscal, economic, and social constraints that are all too obvious." But later he stated it would be wrong in the present circumstances to "pursue this policy rigidly and without regard to immediate and social needs."
His swinging increases in taxation on petrol, tobacco, and alcohol were matched by hefty increases in social welfare payments. In totality his budget is expected to add 2 percent to inflation, which is likely to run at between 18 and 19 percent by the end of this year.
The latest consumer price index shows a rise of 21 percent in the cost of living over the previous 12 months -- the worst inflation rate among the participating countries in the EMS.
Coupled with Ireland's inflation rate is a deteriorating balance-of-trade account. While Ireland was underpinned by sterling, the balance-of-trade figures had no effect on the punt. Now they are a significant barometer of the punt's value abroad.
The early indications are that 1981 will be a difficult time for Irish exporters. A sharp fall in agricultural exports is forecast. Hard-hit farmers destocked their farms in 1980 and live cattle sales are expected to fall by as much as 25 percent this year.
Current estimates suggest Ireland's balance-of-trade deficit will top L900 million ($603 million) this year, which many Irish economists feel cannot be sustained and will put pressure on the Irish government to seek (or be forced) to devalue the punt within the EMS.
A precedent has been established with the Italian lira being devalued in late March by 6 percent, after propping up the foot of the EMS for several months.
But resistance in Dublin to the devaluation of the punt comes from influential quarters, such as the Irish Central Bank. It is argued that, since in 1980 alone the public sector's foreign debt rose L950 million, to L3 billion, the bulk of which was transacted in EMS currencies, a devaluation of the punt would massively increase that debt.
And so the arguments over EMS membership have become a major talking point in a country that throughout its recent history regarded the financial pages of its newspapers as a distraction on the way to the horse racing section.
Irish people are now restricted as to how much money they can take abroad. They are prevented from buying new stocks and shares in Britain. New rules have been adopted by the tiny Irish Stock Exchange.
There is a flurry of activity across the border with Northern Ireland as the punt bobs up and down against sterling and housewives pick and choose between their grocery shop on either side.
The Dublin banks now have foreign-exchange departments with shirt-sleeved officials peering at electronic screens to monitor the punt's performance against other foreign currencies.
It is still a novel experience for many Irish people, and the realization is creeping in that though it took 60 years after achieving political independence from Britain, Ireland now has financia l independence.