The elephant in the room regarding Ireland's future prospects as an economy is our membership of the Euro. Our membership of the Euro was always a matter of politics rather than sound economics - no one really disputes this. Since our membership we have seen nothing other than a much more erratic boom and bust than at anytime in our economic history. This is principally because our prospects as a trading nation is still defined by our relationship with the US and UK rather than Continental Europe. We get our monetary policy from Frankfurt but our economic policy from London and Washington. What our membership of the Euro has shown is that we cannot cope with these conflicting forces.
Ireland has been consistently out of sink with the Euro economy. This is largely the fault of the Irish government rather than Frankfurt. If you have to live with an inappropriate monetary policy then the correct response of government is counter with fiscal policy. That means when interest rates are too low and the currency too weak that fiscal policy acts to dampen economic activity by not cutting taxes, giving out subsidies in the form of tax breaks, and by keeping public spending in check. Of course our FF/PD government did the exact opposite - Frankfurt cannot be blamed for this.
Now that the worm has turned the other way we do not have monetary policy to react and fiscal policy has been hopelessly compromised by the actions of government over the last decade. Previously we could have reacted to these circumstances through devaluation of the currency, thereby cutting the price of our exports but increasing the cost of imports. And devaluation has always worked for us in the past. Without monetary policy we will have to pay for our Euro membership through a severe drop in living standards - this is now unavoidable, anywhere between 10-20%. This will come in the form of real wage cuts and sharp increases in umemployment.
The currency situation now makes all previous predictions on the economy, including the ESRI, all redundant. I am now reckoning on GNP declining over 7% next year with unemployment hitting 15%, and 20% into 2010. I also reckon that the government will not be able to finance the deficit into 2010 - basically no one will lend to them. I have been accused of making outlandish forecasts in the past, however, not only have they come to pass, I have been proven to be somewhat conservative compared to the outturn.
Consequently, the only way I see Ireland avoiding economic armagedon over the next 2 years (barring a worldwide economic upturn that is just not a realistic prospect) is to ditch the Euro. Radical? Yes. Necessary? Absolutely in my view.
So I throw it open to the forum. Anyone with any better analysis or solutions?