Could we even leave the euro if we wanted to?

Duke of Marmalade said:
That is a fantastic article and underpins everything I have been saying. And yet David McWilliams still peddles leaving the euro as the silver bullet to all our woes.
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I don't think it is that fantastic, as it misses some very crucial points. I agree that McWilliams' idea is nonsense, for reasons I explain below.

The main reason for creating a new currency would be to increase the country's competitiveness by making its exports cheaper.
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No, the main reason would be to default on debts and introduce a currency that provides for growth stability.

The first practical problem, then, is that if it becomes clear that a country is seriously thinking of leaving the euro a huge amount of money will leave the country.
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This would only be the case if the replacement currency was perceived as weaker than the euro, which the author does mention later in the article.

Remaining committed to paying interest on that debt in euros while tax revenues are generated in the new currency would be a big risk.

The alternative would be to announce that national borrowings have been converted into the new currency.

For overseas bond investors, this would amount to a default.
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This is exactly what Ireland needs to do, but default should be done before currency conversion and not through currency conversion. The state should take an honest approach to default, not a dishonest one.

When the country wanted to borrow more it would almost certainly have to pay punitive interest rates to persuade bond market investors to participate.
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But this is the last thing Ireland should be looking to do, i.e. default in order to go back into debt. The idea of default is to bring your debts to a manageable level that allow for the economy to recover as quickly as possible. In Argentina's case the default amounted to 30 cents on the dollar (Argentinean debt was predominantly denominated in US$), resulting in an initial jump in bond yields to over 50%. Within 3 years yields were back to "normal" levels and today Argentina can borrow at lower costs than Ireland.

But the key difference is that in these cases the currency into which savings were being switched was perceived to be stable. The incentive for capital flight did not exist.
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This is a very important point, and leaving the euro and replacing it with a new fiat currency punt would certainly result in a flight of capital. But, this would not happen if Ireland were to replace the euro with a credible gold standard, where the exact opposite would happen.
It means that - in purely practical terms - Germany could leave the euro while weaker countries could not.
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The whole premise for saying that it would be a bad move (or impossible) for Ireland but not for a country like Germany, lies in the assumption that the replacement currency would be a weaker fiat currency.

But while some Germans clearly feel nostalgic about the Deutschmark, it seems massively unlikely that a German government would initiate the break-up of the euro.
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I think that all depends on how much German citizens are willing to put up with in order to keep fiscally imprudent states on a life line. While PIGS citizens went to banks to ask for a loan to buy stuff, Germans went to banks to ask for savings accounts in order to buy stuff. At some stage they will get fed up and this can already be seen in Merkel's insistence of getting bondholders to cough up as well!
 
Chris, so I understand your solution is first to default on the debt and then to move from the euro to gold. This latter not as part of fixing the current problem but more as an ideological belief that this will prevent future crises. It certainly differs from the McWilliams school which sees a massive one off devaluation as not only the means to defaulting on external debt but also as the means to reducing the burden of internal debt and imposing internal devaluation. I have a number of questions for your plan.

1) Do you envisage the banks also defaulting and thus going into liquidation?

2) What rate of conversion from euro to gold would you choose? Would it be the one ruling at time of conversion or would you include a massive one off devaluation?

2a) If it includes a massive one off devaluation, how do you address the flight from capital? The name of the game would be to exit now before the conversion and then re-enter buying up the gold.

2b) If it is done at current euro/gold conversion rates how do you address the plight of those in negative equity who would now have their debt frozen in gold with no hope of that traditional palliative, inflation?

3) No matter whether you hard code the imbalances at today's gold/euro conversion rate or at some massive devaluation, it still remains that the government is spending two thirds more than what it is receiving in revenue. Having defaulted on existing debts how do you propose that the government would continue to finance its ongoing deficit?

4) If the government have proved capable of welching on their promise to pay euros how would anybody trust their promise to pay gold?
 
Of course we can leave the euro, we just can't leave it to go back to the Irish punt. I think the best solution would be to consider forming a currency union with the UK and join sterling. We should never, ever have gone into the euro without them anyway because of the the huge amt of trade the two countries do with one another. Which incidentally is one of the reasons the UK has been so quick to give us financial assistance (the other being that their banks are exposed to losses in Irish banks). I know there are strong political and sentimental reason against such a course of action, not to mention other (possibly insurmountable) obstacles. However, it is at least a kite that should be flown if it will help get us out of this awful mess. Personally don't care if the queen's head is on the currency I use if it means a better economic outcome than what we are currently facing.
 
Calico said:
Of course we can leave the euro, we just can't leave it to go back to the Irish punt. I think the best solution would be consider form a currency union with the UK and join sterling. We should never, ever have gone into the euro without them anyway owing to the huge amt of trade the two countries do with one another. I know there are strong political and sentimental reason against such a course of action, not to mention possibly insurmountable other obstacles, but it at least a kite that should be flown to help get us out of this awful mess. Personally don't care if the queen's head is on the currency I use if it means a better economic outcome than what we are currently facing.
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Calico I have huge sympathy with these sentiments. We should not have split with sterling in 1979. We should have done what Luxembourg did when they went into ERM at a fixed 1/1 with the Belgian Franc. By 1999 the option to go with sterling was much more difficult as we had drifted down against the £ during the 20 years of ERM. However it would have been more sensible than going with the euro.

Yes, I think we could manage a change to sterling as there would not necessarily be the same flight of capital as would accompany a plan to make a blatant devaluation into a new punt. This would give us more trading stability going forward but I fear that it would be a bit of a gamble in our current crisis. That is because most of our debt is denominated in non sterling and we would have a massively unstable balance sheet.
 
Duke of Marmalade said:
Chris, so I understand your solution is first to default on the debt and then to move from the euro to gold. This latter not as part of fixing the current problem but more as an ideological belief that this will prevent future crises. It certainly differs from the McWilliams school which sees a massive one off devaluation as not only the means to defaulting on external debt but also as the means to reducing the burden of internal debt and imposing internal devaluation. I have a number of questions for your plan.
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Yes, I would rather see us remain with the Euro than take the McWilliams approach. You could say that it is an ideological solution in order to create a very solid foundation for an economy that is constantly bouncing between bubbles and busts. McWilliams is suggesting getting rid of one evil and replacing it with a worse evil.

Duke of Marmalade said:
1) Do you envisage the banks also defaulting and thus going into liquidation?
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Yes, absolutely. Irish banks are corpses, not zombies, and are dragging down the public finances, and putting a huge strain on the productive economy, through the draining of available credit to functioning businesses.

Duke of Marmalade said:
2) What rate of conversion from euro to gold would you choose? Would it be the one ruling at time of conversion or would you include a massive one off devaluation?
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The conversion would depend on how much gold is in reserve. Of course a totally free banking and monetary system would be more preferable again and would not rely on state gold reserves. Larry Sechrest wrote a good book called Free Banking giving a very good historical account of free banking.

Duke of Marmalade said:
2a) If it includes a massive one off devaluation, how do you address the flight from capital? The name of the game would be to exit now before the conversion and then re-enter buying up the gold.
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The amount of devaluation would depend on the amount of gold backing the new currency. The inflow and outflow of capital will depend more on the credibility of the new currency, which I answer below.

Duke of Marmalade said:
2b) If it is done at current euro/gold conversion rates how do you address the plight of those in negative equity who would now have their debt frozen in gold with no hope of that traditional palliative, inflation?
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That traditional palliative you mention is fraud, and nobody should depend on it to reduce the burden of debt. But personal debt in this country is a very big problem, and just like the state debts, I believe that partial defaults will have to follow at some stage. On the more important plus side, savings would at least hold their value and with increased productivity prices would actually trend lower.

Duke of Marmalade said:
3) No matter whether you hard code the imbalances at today's gold/euro conversion rate or at some massive devaluation, it still remains that the government is spending two thirds more than what it is receiving in revenue. Having defaulted on existing debts how do you propose that the government would continue to finance its ongoing deficit?
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My solution would be to not fund this deficit, but to rather cut the state budget in half. This would allow for a slight reduction in taxation and mean that less money needs to be taken out of the productive economy to pay for government spending. A common argument that this would not be possible is that it would affect front line services. But with only 1 in 3 public employees being guards, nurses, teachers, doctors, fire fighters, there is plenty of room to make such cuts without affecting the front line.
This is what ended the US depression of 1920, where president Harding reduced government spending by 50% over two years. as well as reduce taxation, and within the two years the economy was booming.

Duke of Marmalade said:
4) If the government have proved capable of welching on their promise to pay euros how would anybody trust their promise to pay gold?
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Very good point, and in my opinion this is the biggest hurdle in creating a "credible" gold standard
 
Chris said:
My solution would be to not fund this deficit, but to rather cut the state budget in half. This would allow for a slight reduction in taxation and mean that less money needs to be taken out of the productive economy to pay for government spending. A common argument that this would not be possible is that it would affect front line services. But with only 1 in 3 public employees being guards, nurses, teachers, doctors, fire fighters, there is plenty of room to make such cuts without affecting the front line.
This is what ended the US depression of 1920, where president Harding reduced government spending by 50% over two years. as well as reduce taxation, and within the two years the economy was booming.
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Hi Chris, do you have a link to this - sounds v interesting?
 
Chris said:
The inflow and outflow of capital will depend more on the credibility of the new currency, which I answer below.
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No, the inflow and outflow would be determined by the anticipated rate of conversion, and the immediate impact on its exchange rate. The subsequent strength of the new currency would be irrelevant in this calculus.

I note your other points: let the banks collapse, immediately remove the deficit etc. I can see that all that would be left of the economy would be a robust currency but nobody owning any of it.:p
 
Question on this exiting the euro ? What would it mean for your mortgage/loans ?
e.g. say you have an existing mortgage say 150K on a 3% rate? Does that automatically get transferred to new currency at your new conversion rate and then you continue to pay that new value (whatever it is) at 3% ? Could that not push your mortgage bill to 200K ?
 
I missed this post.
Duke of Marmalade said:
No, the inflow and outflow would be determined by the anticipated rate of conversion, and the immediate impact on its exchange rate. The subsequent strength of the new currency would be irrelevant in this calculus.
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I think my post was a bit unclear. Of course there would be a devaluation with a gold standard as well, unles Ireland has some hidden massive gold reserves. But devaluation to a gold backed currency would be better than devaluation to a fiat currency backed by promises and incompetence of government.
Therefore the credibility of the gold currency would influence the flow of capital.

Duke of Marmalade said:
I note your other points: let the banks collapse, immediately remove the deficit etc. I can see that all that would be left of the economy would be a robust currency but nobody owning any of it.:p
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Hahaha, very witty. But I would be of a quite opposite opinion. I refer to my earlier post about the depression of 1920: Federal budget cut in half, insolvent businesses were liquidated, reduced taxation, gold standard, no monetary inflation, and all this resulted in a booming recovery within months.
 
we have had major annual capital flight in the past decade ,over a billion to poland alone in 2007 ,no point joining a debt burdened currency like sterling or dollar ,
anyway at the end of the day imf will decide what will happen with our woes and it looks like we will be leaving the euro.

pimco were quoted as saying it would be best for ireland to leave the euro,and whos their boss only the man hotly tipped to be the next head of the imf..
 
I'd think that leaving the Euro would initially cause maybe a little financial panic, and issues (even with other countries that do use the Euro) but that would eventually pass
 
This is all fascinating and terrifying at the same time. On Newsnight tonight, one of the correspondents said that European politicians had a "summer of 1914" attitude towards the euro, claiming that everything is going to be fine because the alternative is unthinkable. Maybe it is, but that doesn't mean it's not going to happen. A couple of questions: first if (as an uncomfortably large number are predicting) the euro collapses this year, what happens to my savings in the bank? Do I suddenly have nothing? Or do the old national currencies suddenly reappear? If this last happens, according to the article, what actually happens is that a bunch of new currencies appear, most of which will not be worth the paper they're printed on. My fiancee is British and we have a joint account in the Clydesdale bank over there. We don't use it much, but I'm considering transferring what savings I have into sterling and depositing them there. Any opinions?
 
Any argument for why the EU doesn't follow other markets and just orient more euro to relieve Europe of some of the pain. The US has hit the printing press on a number of occasions as have the Uk
 
ccraig said:
Any argument for why the EU doesn't follow other markets and just orient more euro to relieve Europe of some of the pain. The US has hit the printing press on a number of occasions as have the Uk
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Europe isn't the UK or the US - it's a conglomeration of countries. Some are wealthier than others, some have behaved responsibly while others haven't. And as anyone who has ever worked in a committee knows, decisions take forever to get made. And the ECB is supposed to be independent, so it doesn't care about politics.
There are a lot of people around saying that the printing press isn't going to solve America's or Britain's woes.
I guess we'll find out!
 
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