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Our present financial problems stem from a desire to maintain a stable exchange rate within the EMS and at the same time to have a favourable exchange rate with Sterling. It is just not possible, under present conditions, to achieve both of these objectives. The question then is, which of the objectives to go for, or whether it would be better to go to some middle ground, incorporating elements of both.
The advantage of the EMS option is that it would aid the establishment and maintenance of stable trading links with other EEC countries that are members of the EMS. A favourable exchange rate with Sterling is, on the other hand, necessary for the protection of our existing considerable trading links with the UK. The second option has obviously quite a considerable importance, as Britain is our single biggest trading partner. We have increasing trade with other EEC countries and non-EEC countries, and the maintenance of favourable and stable exchange rate with these is also important. It is a question of balance, therefore, to pick an exchange rate which gives the best overall advantage to Ireland. We cannot go completely on our own however, as we are too small and our currency could become the plaything of large international speculators. I would like to suggest the following solution to the problem.
The Irish pound should be linked to the EMS currencies as at present. It should be allowed, however, in view of the high dependence on the British Market, 40 per cent of any devaluation or appreciation of the British currency relative to the EMS. Thus if the British pound devalues by say 10 per cent the Irish pound would automatically devalue by 4 per cent and if at a later stage Sterling goes up by 12 per cent the Irish pound would increase in value by 4.8 per cent. A 5 per cent fluctuation band, +/-2.5 per cent, would be allowed for the Irish pound round the value set by this mechanism. This would protect the day to day value of the Irish Pound from minor fluctuations in the value of Sterling. The EMS countries should be asked to support the Irish currency and keep it within these limits. I think a 6 per cent devaluation of the Irish Pound, within the EMS, would be required prior to entry into this mechanism.
Adoption of the above proposals, would, I am convinced, preserve a more favourable exchange rate with Sterling, while maintaining a degree of stability with the EMS currencies. It would also pave the way for a return to lower interest rates, which is very necessary for the development of the Irish economy.
Current Comment
Little changes. (7/9/98)
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