Professor Frank Barry:

The single currency was a political project. It was not an economic project. It was not designed by economists and most economists were probably quite antagonistic to it. I am, therefore, going to be forced to say something about politics and to step outside my own area. I agree with Mr. Colm McCarthy that no side has come out well over the current impasse. Syriza had a very weak hand to begin with and played it very badly. My graduate students were asking me over recent months whether it had not got any diplomatic advice. Germany has reversed 50 years of hard work developing goodwill on the part of the other peoples of Europe.

Ireland has not played its hand well over this impasse either. I remind the committee of a comment the historian Joe Lee made 30 years ago. “[While] the ‘political’ skills of Irish representatives in negotiating situations are widely acknowledged ... there seems to be no comparable criterion for assessing the calibre of conceptualisation of the Irish case.” He is suggesting that we have a very good diplomatic service, which I think has stood us in very good stead. However, the comments my graduate students made about Syriza can also be levelled at the Irish Government. Traditionally, the Government's comparative advantage has been as arbitrators and facilitators in negotiations. It did not make any attempt whatsoever to play that role this time round. We seem to have forgotten a point Garret FitzGerald stressed repeatedly. Every time he spoke about the European Union, he noted the important role the European Commission played as a defender of the interests of smaller states. The European Commission has really been sidelined completely over the course of this impasse. It has been sidelined over the course of the crisis going on years. It is in our interests and the interests of other small and weaker states to try to resurrect the power and the influence of the Commission. Instead what we have had over recent weeks is a naked battle of interests. In these kind of battles, the interests of the strong will always dominate the interests of the weak. This is something we really need to bear in mind.

Let us think back to the logic behind the single currency. Flexible exchange rate systems lead to dramatic fluctuations in international competitiveness which can lead to conflict between states. They are, therefore, regarded as undesirable. The system of fixed exchange rates which we had over several decades or so in the run up to the introduction of the single currency was also regarded as undesirable because it did not prevent speculative attacks against currencies in the fixed exchange rate systems. I am sure the committee will remember sterling crashed out of the fixed exchange rate very dramatically in 1992. Then the speculative pressure came on Ireland and we crashed out shortly thereafter. The single currency was seen as a way to avoid the undesirability of both flexible and fixed exchange rates. Now, as Mr. Colm McCarthy said, rather than having an irrevocably fixed single currency that prevents speculative attacks, we have returned, under this notion of a Greek timeout from the euro, to that era of fixed exchange rates which are not irrevocably fixed. We are now back into one of those worlds, which was deemed undesirable to begin with and one of the benefits of introducing a single currency.

Economists always view the introduction of a single currency essentially as a European federalist project. It was known that there were design flaws in the system, but the assumption would be that when cracks appeared, that would lead to closer integration, essentially a united states of Europe. It is clear there is no appetite for this now. The people who constructed the euro to begin with were of that kind of federalist disposition and assumed that ultimately we would move in that direction and have something like a big Washington budget that cushions states of the US when they are hit by a shock. We have no equivalent in Europe. That is what I mean by euro federalism. There is clearly no appetite for that now so we are stuck in limbo, or in a worse place.

The rigid fiscal rules that have been imposed and strengthened over time in the eurozone were really designed to obviate the need for that sort of Washington-style budget. The notion was if countries adhered rigidly to these fiscal rules, they would not get into the sort of crisis where a Washington-type budget might be required. Those fiscal rules were policed by the no bailout clause. The no bailout clause said, "If you make mistakes, you suffer." It was designed to ensure mistakes were not made. The no bailout clause imposes costs on lenders as well as borrowers. If a company goes bankrupt, lenders suffer as well as the company. The no bailout clause rule was overturned in the Greek case in 2010 by the troika. As Mr. Colm McCarthy said, the IMF tore up its own rule book in tearing up the no bailout clause. If the no bailout clause had been rigidly imposed in 2010, the IMF would have said essentially that Greece was bankrupt and that people who lent money to Greece would have to take a haircut or write off their debts. That was overturned. It was very strange that the IMF did it but the IMF, as Mr. Colm McCarthy said, is politicised.

Since then the successive Greek deals have said, in essence, and I will try to put it as pithily as possible: "We will lend you more money, which you will never be able to pay back, in order to help you pay off your creditors". That is what these Greek deals say. When I say it in that way, it is clear that it cannot work. These debts will be written off sooner or later. Ten years hence, when we are out of this crisis, these debts will be written off.

Essentially, all this talk about reprofiling is a pretence or mirage. If Colm McCarthy owes me €1,000 and he is supposed to pay it back to me tomorrow, which is like money in my pocket, reprofiling means that I tell him not to mind paying it off tomorrow but I will take it from him 50 years hence. That is what reprofiling is. It is really the same as writing off the debts. It is pushing them out so far into the future that, essentially, it is meaningless. Governments do this for political reasons, not for economic reasons. It is essentially the same as a write-off except it does not allow Greece to return to private markets. Greece is still sitting with this high nominal debt-to-GDP ratio, so it cannot borrow in private markets. It is the same as a write-off except it does not achieve the same purpose as a write-off would, which is to allow Greece return to private markets and borrow to get its economy under control.

For Greece, the situation with the current deal is that reforms are mandatory. Nobody disagrees with reforms. In the Irish case, to be honest, when the troika came here most economists more or less breathed a sigh of relief thinking that this would enable some reforms to be introduced in Ireland that the politicians could not get through because of the power of vested interests. The question is whether that has actually succeeded, whether we have seen the legal profession opened up or not and so forth, and whether those reforms have really been achieved. Reforms are a good thing, but reforms will yield economic benefits only in the long run. There is no way that a reform will appear in the form of increased GDP over the next year or two. It is a long run process.

The second element of the Greek deal is more austerity. Austerity is detrimental in the short run. It is a great deal more detrimental to Greece. An equivalent amount of austerity in Greece is much more detrimental to the economy because the Greek economy is so much more closed. With austerity in Ireland much of the hit is taken by imports. We are three times more open to imports than Greece is, just as we are far more export oriented. Being an open economy means that part of austerity is cushioned as the blow is taken by imports. More austerity for Greece has a more dramatic impact on Greek GDP.

The final point I wish to make concerns the role of the European Central Bank, ECB. Again, politics comes into play here. For the last few years Mario Draghi has been the hero of the weaker, peripheral nations in Europe. When he announced quantitative easing and said the ECB would do whatever it takes, that was to the benefit of the debtor countries. The creditor countries, such as Germany, did not like it. In the long term it is like inflating away one's debt. Mr. Draghi was a godsend to the European periphery. Politically, he and his cadre have seen that they have moved too far in terms of being in the corner of the weaker, peripheral states and over the current crisis they have reversed position and taken a course of action that has been detrimental to the peripheral states, particularly to Greece. As Colm McCarthy has been writing, the Greek banks were solvent the last time it was checked, therefore the role of the ECB is to carry out its main function, which is to provide liquidity to banks that are solvent but illiquid. It has failed in its duty to do that, for political reasons.

We are in a mess and, as yet, no exit strategy has been mapped out from the mess.