Vol. 443 No. 6
15 Mr. Barry asked the Minister for Finance if his attention has been drawn to a report from the Economic and Social Research Institute that the delayed devaluation of the Irish pound during the 1992-1993 currency crisis cost the Irish Exchequer £350 million; and if he will make a statement on the matter.
I presume the Deputy is referring to an article written by Professor Patrick Honohan and published in the Irish Banking Review in April 1994. While Professor Honohan is employed by the Economic and Social Research Institute, I understand that he wrote the article in his private capacity and it is not a report published by the ESRI.
Professor Honohan's figure of £350 million is his estimate of the direct cost to the Irish Exchequer of not devaluing the Irish pound in September 1992, when the currency crisis began, but waiting instead until end-January 1993. The figure is based on what Professor Honohan acknowledges is a "somewhat unrealistic hypothesis". Essentially, the figure would only be valid if the option of a 10 per cent devaluation of the central rate of the Irish pound in the ERM had been available in September 1992, if it would have represented a sound policy move at that stage and if it would have been followed by the positive interest rate developments which characterised the period after the January 1993 devaluation. As the first two of these conditions were not in fact fulfilled and as there is no reason to believe that the third would have been fulfilled to the extend assumed I do not consider Professor Honohan's figure to be a realistic one.
Would the Minister agree that his failure to devalue early is the most serious blot on his copy book in his handling of the financial affairs of this country? Does he acknowledge that the cut in international interest rates has nothing to do with economic management by this Government but has to do with the devaluation which facilitated the low interest rates which are the basis of economic recovery at present?
If Deputy Yates believes what he said it would mean that he totally misunderstands the position. He should check with my Greek colleagues with whom I sympathise because of the pressure the drachma is under. The Portuguese escudo has been under pressure for several weeks. Even with low interest rates if there are economic disabilities in the system these will create difficulties. My views on this matter are well known. It would have been a disaster to have devalued in September 1992. Perhaps devaluing a few weeks earlier might have made some difference but not a great deal.
It has been long accepted by people of differing views that had we attempted to devalue in September 1992 after the fallout from the departure of sterling from the ERM system the most we could have devalued would be by 4 per cent on the central rate. We would have had to come back in November, when Spain and Portugal had to go, and probably again in January. If we missed January we would have had to change again. We were totally unaffected by the difficulties in May, June and July of 1993. If Deputy Yates ever achieves his ambition to be on this side of the House I hope he adopts the same position as we did because it would be the correct one.
Is the Minister aware that he, his colleagues in the Department and the Central Bank took the view that the Irish pound was sustainable at £1.04 or £1.06 against sterling? They gambled and they lost. At the end of the day the Government, in a most humiliating fashion, had to devalue and face reality.
The council of the then amalgamated Federated Union of Employers and the CII met on Monday of the week the Government devalued with some individuals intending to request the Government to devalue — if it went to a vote they would have lost, perhaps not substantially, but there would have been a clear majority against devaluation. Instead they came to see me and asked me to do what I thought was best. The decision of the new Government proved to be the right one for the economy. I was glad to hear Theo Waigel, a man of the highest standing in the world market, comment yesterday on the way the crisis was handled here. I have no doubt Deputy Yates is proud of his comments considering that his party, through Deputy Noonan, supported us during that period, for which we were very grateful.
