STOCK MARKET WATCH, Thursday, December 15, 2011

[xchrom]

23. europe: Euro Pact Ignores Ireland’s Being Out of Synch: Frank Barry

http://www.bloomberg.com/news/2011-12-15/euro-pact-ignores-ireland-s-being-out-of-synch-commentary-by-frank-barry.html

In 1999, when the Irish government adopted the euro, most Irish economists disagreed with the decision. It was made partly to reduce the country’s trade dependence on the U.K. But to use currency policy to achieve this was to place the cart before the horse.

Ireland’s business cycle is out of sync with the euro zone. It has an Atlantic economy: The U.K. remains the major export destination for Irish-owned companies, while the U.S. is the source of most incoming investments. A fiscal policy harmonized within the euro area will not synchronize the Irish business cycle with that of the French-German core.

In the U.S., any such lack of synchronicity among regions is addressed by the enormous federal budget. For every $1 worth of shock to a region’s income relative to the U.S. average, the budget provides 30 to 40 cents through reduced federal taxation and increased regional spending.

Such fiscal federalism is necessary for a monetary union to function effectively. The European Union deal announced last week studiously ignores this need. But at some point it must come onto the agenda, or further crises are guaranteed.