Ireland has some lessons for an independent Scotland

It wasn’t the only high-profile Irish victory on the international stage recently. The signing of the Windsor Framework in February solidified British commitments to maintaining an open border on the island of Ireland despite Brexit.

When the Irish state was established in 1922, it was generally seen as an economic backwater, dependent on agriculture and trade with Britain. Despite some problems, particularly in the area of housing, the Republic of Ireland today boasts a high-tech economy and seemingly commands diplomatic clout when negotiating with the UK.

So, what can exponents of Scottish independence learn from Ireland? Two of Ireland’s most eminent economists from both sides of the border give their opinions.

Dr Ronan Lyons is an associate professor of economics at Trinity College, Dublin. His research focuses mainly on housing markets, urban economics and economic history.

He also authors housing market reports for property website daft.ie.

Dr Esmond Birnie is a senior economist in the Business School at Ulster University. He was the chief economist for PwC in Northern Ireland and Scotland from 2010-16 and a member of the Northern Ireland Assembly for the Ulster Unionist Party from 1998-2007.

Currency

THe Scottish Government’s present position is that an independent Scotland should introduce its own currency as soon as practicable but continue to use sterling until then.

This is quite like the approach taken by the nascent Irish state. It continued to rely on sterling until the Irish punt was gradually introduced in 1928. However, the legacy of British rule continued to shape Irish monetary policy for decades.

In 1925, the UK accounted for 97.2% of Irish exports. This reliance saw the Irish government keep its currency pegged to sterling and maintain a de facto capital and labour market union with Britain for much of the 20th century.

“That was an explicit choice,” Lyons says. “It could have gone a different route but in the 1920s and even in the 40s and 50s, Britain was such a large share of Ireland’s external economic relations that the choice just kind of made sense.”

The choice was not without its consequences. Disaster struck in 1955 when the UK raised interest rates to quell inflationary pressures. The Irish government failed to implement corresponding measures and therefore the state suffered substantial capital flight.

Irish funds were quickly reinvested in Britain to access higher interest rates and the banking system came under pressure. The government was subsequently forced to implement a painful deflationary budget as emigration spiked.

This event starkly illustrates the policy constraints faced by small economies. Lyons says: “Ireland tried to do something different in terms of interest rates but kept the exchange rate the same and it paid the price.”

As of 2019, 59.7% of Scottish exports went to the rest of the UK. An independent Scotland would have to choose between having an independent monetary policy or smooth access to English markets through a pegged currency and capital market integration.

Ireland’s adoption of the euro further enshrined its inability to devalue its currency. According to Lyons, this experience has seen the Republic “very slowly getting around to getting on top of fiscal policy”.

Monetary policy in theory doesn’t affect an economy’s long-term growth, it merely smooths the turbulence along the way. In principle, if Scotland was to forgo monetary tools, this would greatly increase the incentive and need for vigilant management of the economy.

Devolution Difficulties

AT present, Scotland is a net beneficiary of regional fiscal transfers within the UK. Critics assert that this figure includes UK-wide expenditure “on behalf” of Scotland, some of which might be superfluous in an independent state. Nonetheless, Scotland under devolution primarily operates under a system of transfers from London.

Birnie has previously written about the effects of this system in Northern Ireland, where the subvention in proportionate terms is far higher. He believes there are both positive and negative aspects to it.

“It helps with paying for the spending power in your economy, that therefore raises output and lowers unemployment. Especially in times of economic crisis, it’s helpful for a regional economy to be part of a bigger fiscal union.”

However, this can lead to distortions in the long run. “Both in the public and private sector, there can be a mentality that we may have certain deep-rooted problems but we don’t really need to reform anything fundamentally because a very substantial amount of money will be coming in the block grant.”

Borders, Trade and National Development

NORTHERN Ireland’s special access to the EU’s single market as part of the Protocol was the source of much jealousy in Scotland.

Its recent economic performance compared to Britain may indicate the benefits of this arrangement but Birnie points out the presence of an Irish Sea border is not cost-free. The existence of the Protocol is testament to Irish insistence that a hard land border be avoided.

Both economists agree some form of border infrastructure with England would be likely if an independent Scotland were to pursue membership of the single market, customs union or the EU.

This would undoubtedly bring certain costs. Lyons says of such an arrangement; “It’s certainly doable but it requires a bit of good faith on both sides … and if Scotland went independent, good faith might be in short supply, at least with some parties.”

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Ultimately, it is a matter for proponents of independence to envisage a workable border arrangement and assess whether costs associated with it are a price worth paying for greater alignment with Europe. Unfettered access to EU markets was pivotal for the Republic of Ireland’s development as a high-value export-led economy and a hub for foreign direct investment.

Lyons says: “The relative success there came down to freedoms that would not have been obvious if Ireland had stayed a full member of the United Kingdom. It took a long time to do so but eventually the dividend started to pay off.”

Birnie also acknowledges that the Republic’s ability to take responsibility over its own affairs has allowed society to develop economically, however he does stipulate that this took many decades.

Conclusion

ALL major economic decisions that an independent Scotland would have to take involve some degree of trade-off. The Republic of Ireland proves it is possible to independently develop as an open, export-led, European economy.

The leadership of the independence movement needs to seriously evaluate whether this is a model worth emulating, given the potential costs and benefits. In the meantime, the SNP face the formidable task of overcoming its present difficulties and regaining public confidence within the confines of devolution.

Only then can it offer a credible alternative to Westminster rule.