# Who will fund deficit if we leave Euro



## dewdrop (16 Jul 2011)

Daily  i have to endure listening to learned people saying we should leave the euro just like as hopping of a bus. No one ever raises the simple question who will then fund our ongoing deficit at present i think is around 18 billion.


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## Duke of Marmalade (16 Jul 2011)

Not sure this is a LOS topic. The argument is that with your own currency you can print the money to pay for the deficits.

[broken link removed]truly excellent article in today's Irish Times points out the sheer impossibility of going back on the Euro now, even though probably everyone from Germans to ourselves now agree with Margaret Thatcher that it was a daft idea to begin with.


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## dewdrop (16 Jul 2011)

I posted it in the LOS as i wanted any comment to be simple.  No offence to posters in the other fora on this subject


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## horusd (16 Jul 2011)

It would probably entail :

An immediate sovereign default.
A balanced budget. The shock would be horrendous. Massive wage, welfare & services cuts.
Loss of liquidity as ECB stops bank funding. Bank failure?
Massive increases in costs of FX denominated goods/services. i.e Oil.
Defaults on mortgages & loans denominated in Euro.


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## Grizzly (17 Jul 2011)

I imagine that we would end up a bit like Cuba. Growing our own veg, holidays in Bray, recycling pieces of string, lots of small and local industries trading with each other, living off the splash.......after we have accepted what has happened.


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## dewdrop (17 Jul 2011)

Thanks Horusd. its a pity people who suggest exit from the euro do not spell out the consequences as you have clearly done.


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## Duke of Marmalade (17 Jul 2011)

dewdrop said:


> Thanks Horusd. its a pity people who suggest exit from the euro do not spell out the consequences as you have clearly done.


Whilst I agree with most of _Horusd's_ analysis, in answer to your question, the one problem that would go away would be that of balancing the budget. It simply balances by printing the new currency. That is presumably the reason for the clamour to leave the euro, on the face of it you escape all this austerity stuff.

It is ironic that if the government reduced PS pay by 10% the Bearded Ones would cry foul and throw the whole of Croke Park at Leinster House. However, if The government instead changed PS pay to Punts Nua, keeping salary levels the same, and then the Punt Nua fell by 50% the Bearded Ones would be happy, at least everyone else is also taking the hit.

Ireland's problem is not an economic one. We have a modern industrial base and are paying our way in the world. Okay, there is too much unemployment but that too is not essentially an economic problem. Third World countries face real economic problems in that their economies simply lack the development and capacity to deliver prosperity.

Ireland's problems are political. The apparent economic imbalances can be solved at a stroke by cutting PS pay and Social Welfare to the levels of our nearest neighbour. Politically, we simply can't put into play these very obvious economic steps that would put us back on track.


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## oldnick (17 Jul 2011)

Leave the Euro ? There may not be any Euro depending on events in Europe -not just Spain and Italy - but also in USA.

Pondering the consequences of leaving the Euro is a bit like discussing what will happen if one jumps off a ship now or before it stikes the rocks. 
Horus and grizzly are probably right in their forecasts of what will happen to Ireland if we leave the Euro. But they may also be right if Ireland stays in the Euro ,and the Euro collapses. Either way we're screwed.

(p.s. This weeks Economists lead article and front page headline -Euro on the Edge.)


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## dewdrop (17 Jul 2011)

Rightly or wrongly I always thought that printing more money to pay for the deficit would have severe consequences like hyper inflation.  Anyway who would accept our new currency to pay for imports?


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## Duke of Marmalade (17 Jul 2011)

dewdrop said:


> Rightly or wrongly I always thought that printing more money to pay for the deficit would have severe consequences like hyper inflation. Anyway who would accept our new currency to pay for imports?


Absolutely, but the deficit itself is sorted, at least temporarily, and politically that is always the one which is most difficult to tackle directly.


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## Purple (17 Jul 2011)

As far as I know only the British loan agreement required repayment in GB pounds. If that is the case then we can repay loans in our new currency at the exchange rate set on the day we leave the Euro.
Hyper-inflation etc would still be a problem.


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## horusd (18 Jul 2011)

It's probably worth mentioning that the upside of leaving the Euro would be:

Devaluation and increased competitiveness. 
Reduction in imports as these costs rise.
Some ability to increase liquidity by quantative easing. i.e printing money.
Some control of interest policy.Tho how much is a bigger question.

Dewdrop we would have little real difficulty in getting people to use/accept  our new punt.  All goods produced in Ireland would be denominated in it. To buy them foreigners would _*need *_to buy IRL £'s. We are an export-led economy, selling our punts would be relatively easy. All tourists/visitors entering Ireland likewise.

The bigger question (and I don't know the answer) would be what happens to mortgages,loans and ECB liquidity  etc. If these were converted to IRL£'s at a rate of 1:1 and then the IRL£ floated ( dropping like a stone!) it might be a good thing. But the chances of the ECB allowing this are zilch.


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## Sunny (18 Jul 2011)

People talk about the benefits of devaluation and increased competitiveness and reduction in imports but forget that Ireland is an export economy because of one sector, the multi-nationals. We don't have a huge domestic manufacturing economy that exports. Leave the euro and the imput costs for the multinationals would rocket. The devaluation would have very little impact on their export values and then we would have capital controls in place. They would be gone in a week. 

Leaving the Euro is not an option unless every Country decides to abandon the project.


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## Shawady (18 Jul 2011)

Is it more likely that the stronger countries like Germany leave the euro and it will become a weak currency for the likes of us and Greece?


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## Sunny (18 Jul 2011)

Shawady said:


> Is it more likely that the stronger countries like Germany leave the euro and it will become a weak currency for the likes of us and Greece?


 
I have heard this but the truth is that Germany have benefited from the Euro as much as anyone else despite their bleeting. Ask German businesses what they think and they all want the Euro. I remember being at a presentation a couple of years ago and the CEO of one of the large Auto companies was saying that politicians in Germany had done a terrible job in selling the Euro project to the ordinary German people. Same accusation could be made in most Countries.


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## Purple (18 Jul 2011)

Sunny said:


> Leave the euro and the imput costs for the multinationals would rocket. The devaluation would have very little impact on their export values and then we would have capital controls in place.


Can you expand on those two points please Sunny?


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## horusd (18 Jul 2011)

Purple _some_ Multi's import part finished products/base products from sister operations & export from Ireland, hence availing of low corpo tax on total product as technically it is made in IRL. They would buy in FX using punts I assume, hence costs would riseas IRL £ devalues, and also be subject to currency flux. But, given rise in value of exports in IRL£'s I would assume this would be a zero sum game, except for FX flux ?


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## Sunny (18 Jul 2011)

Purple said:


> Can you expand on those two points please Sunny?


 
The input costs would rise for two main reasons. The import content of our exported goods is one of the highest in the OECD (we import nearly all our raw materials). These would rise dramatically. You would have a massive inflation problem in Ireland itself so wage costs etc would be under pressure.

The value of the exports would not rise greatly because of where we compete in the market i.e. at the higher end of technology and pharmaceutical. Sales of viagra are not going to suddenly rocket because Ireland introduced a cheap currency and devalued. The Multi-national sector in Ireland likes a strong Euro. Introduce a basket case currency with constant devaluations and currency controls and they would shift operations straight away. I also assume we would probably have to leave the EU as well as the Euro so that is another potential problem.


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## Shawady (18 Jul 2011)

What about the "nuclear option" of printing money?
Whats the downside to Ireland here?


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## horusd (18 Jul 2011)

Sunny I'm confused now! If I make X and need to import the raw materials, I pay for example, 1000 IRL for them (equalling 500 Euro for example), and I export X and charge IRL1500 (750 Euro) does it matter to me (apart from FX issues) what currency I use?  Also, why do you think currency controls would be needed?


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## Duke of Marmalade (18 Jul 2011)

First of all let it be repeated there is no way whatsoever of anybody leaving the euro.  That is despite the fact that most people now agree it was a dreadful mistake.  As the IT put it, abandoning the euro is like unscrambling an egg, not possible.

Does not stop us indulging the academic debate about the consequences of introducing Punts Nua.  I'm with _horusd _on the theoretical implications for US MNCs.  The domestic currency merely affects the value added in Ireland.  This would presumably become cheaper in the short term as the Punt Nua devalued thus actually making it more advantageous for US MNCs to transfer price through Ireland.

But I am with _Sunny_ that the consequences of leaving the euro, including capital controls and leaving the EU itself, would be so horrendous as to scare all the MNCs away.


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## shnaek (18 Jul 2011)

So do you think the rumours that the central bank are printing Irish punts are just rumours? Or do you think they are preparing a Plan B?


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## Pique318 (19 Jul 2011)

shnaek said:


> So do you think the rumours that the central bank are printing Irish punts are just rumours? Or do you think they are preparing a Plan B?


 ROFL

Where did this doozy come up shnaek ?


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## horusd (19 Jul 2011)

shnaek said:


> So do you think the rumours that the central bank are printing Irish punts are just rumours? Or do you think they are preparing a Plan B?


 

This mightn't be too outlandish an idea after all. The existential threat to the Euro grows by the day.An ex-member of the Bank of England, (Professor ?) stated on Morning Ireland that it was heading towards  50/50 as to whether the Euro can survive. Bond rates for Italy & Spain are heading for the magic 7% which would effectively bar them from the bond market. It doesn't look like the big Pow-Wow on Thursday will come up with a plan that can draw a line under the Euroland's problems. "May you live in interesting times" says an old Chinese proverb, well, we're certainly doing that.


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## Duke of Marmalade (19 Jul 2011)

shnaek said:


> So do you think the rumours that the central bank are printing Irish punts are just rumours? Or do you think they are preparing a Plan B?


Shane Ross irresponsibly aired this rumour in the _Sindo_. Is this the same rumour that says the Greeks are secretly printing Drachma, the Portuguese Escudos, the Spanish Pesetas, Francs, Lire, D-marks, F-marks etc. etc.?. Do you really think this printing of legacy currencies can be kept a secret across 17 countries until Hey Presto! (maybe this Thursday) we wake up to find all our ATMs from Helsinki to Palermo, from Tralee to Bratislava will be filled with new notes. Or is this just a secret solo run by Dame Street? Get Real 

The Irish Times stated it so graphically, returning to legacy currencies is like unscrambling an egg. The Brits really wet themselves at the possibility of such a meltdown and chaos in Euroland and that includes ex professors of the Bank of England, the FT, the Murdoch Press, the far right Euroskeptics, the far left Euroskeptics. And still the Euro maintains the 30% appreciation that it gained over sterling's disastrous performance in the crisis.


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## shnaek (19 Jul 2011)

Duke of Marmalade said:


> Do you really think this printing of legacy currencies can be kept a secret across 17 countries until Hey Presto! (maybe this Thursday) we wake up to find all our ATMs from Helsinki to Palermo, from Tralee to Bratislava will be filled with new notes.


Did we not wake up one morning to find our ATM's filled with new notes not all that long ago? The Euro might go on, but the chances of it going on with us not in it, I believe, have moved beyond 50/50. But that is just my opinion.


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## Duke of Marmalade (20 Jul 2011)

shnaek said:


> Did we not wake up one morning to find our ATM's filled with new notes not all that long ago?


No, it took three years, it didn't happen one morning. Really, the idea that such a grand scheme could be conducted in secret by a select elite is the depths of nonsensical conspiracy theory. 

You seem to subscribe to the "Dame Street Solo Run" school of this crackpot theory. So Ireland is going to secretly leave the Euro but Greece and Portugal are going to stay. If you are prepared to back that at odds on, let me advise you to give up gambling.


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## shnaek (20 Jul 2011)

Now, what else can I say to get the third 'mad' face from Duke of Marmalade and unlock the mystic sword of AAM... 
It would seem unlikely that our bureaucrats, talented as they are, could pull something like this off without any leaks. But I would be surprised if they haven't a plan B in mind - just in case our European partners can't get a plan together. Leaving the Euro would be traumatic for the Irish economy - there's no doubt about that. But I'd be surprised if our government aren't researching the outcome of such a move, and maybe even planning for what might happen if we do have to leave.


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## Shawady (20 Jul 2011)

Forget about the economic implications if we leave the euro. Is it in theory possible?
Can a government say for example, on 1st Jan 2012 we will be reverting back to our old currency at the rate of 1 euro = .79 punt?


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## Mpsox (20 Jul 2011)

I'd take anything said by a lot of British newspapers/magazines on the € with a huge grain of salt. Their "john Bull" anti anything to do with Europe bias is always there in the background. It also acts as a handy smoke screen for some of their own internal UK issues.

Were we to leave the € there would be a signifcant cost to retailers and banks in terms of changing systems/tills etc. It's not something that can be done overnight and shouldn't be underestimated. As someone said in a previous post, the change to the € took 3 years.


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## Duke of Marmalade (20 Jul 2011)

Shawady said:


> Forget about the economic implications if we leave the euro. Is it in theory possible?
> Can a government say for example, on 1st Jan 2012 we will be reverting back to our old currency at the rate of 1 euro = .79 punt?


There have been currency conversions flagged well in advance before. For example, the change to new francs but most graphically the change for 11 countries to euro which was given a 3 year flag. The key feature was that no one feared for the future of the new currency and therefore there was no flight of capital. Even Germans, who might probably have preferred to keep their D-marks, had no alternative, they were not going to jump into dollars/sterling.

Now if we were given 6 month advance notice of a switch back to punts, the queus to withdraw euros from the banks would stretch the length of the M50.


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## Sunny (21 Jul 2011)

I know some people call for leaving the IMF/EURO deal and balance the budget on day one. Karl Whelan posted this on Irisheconomy.ie  It deals with the impacts in the US if the debt ceiling isn't raised. Would be interesting to see the same document done for the Irish economy if we told our IMF/EU/ECB masters where to go. 

[broken link removed]


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## Duke of Marmalade (22 Jul 2011)

Time to give that flagging rumour a bit of a boost.  I heard that the theme on the notes will be the popes and that Benny himself has already posed for the 50 Punt Nua.


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## ringledman (22 Jul 2011)

Mpsox said:


> I'd take anything said by a lot of British newspapers/magazines on the € with a huge grain of salt. Their "john Bull" anti anything to do with Europe bias is always there in the background. It also acts as a handy smoke screen for some of their own internal UK issues.


 
Thank god we stayed out of the Euro in the UK. Brown's one and only decent policy.

Control of interest rates, control of monetary policy. The UK has done much better than the euro zone as a result during the crisis. 

The deflationary depression has been largely avoided, albeit at an inflationary errosion in people's living standards. The UK is now highly competitive in terms of manufacturing and service industries as a result of a weakened currency. 

The PIIGS need a devalued currency fast as goods and services are way too expensive for the globalised market we live in. Yet what does the ECB do? raises interest rates. Madness.

The problem the europhiles have is that they want the Euro to succeed without putting in place the federal policies and systems to allow it to do so. 

The fundamental flaw in the euro model is that you have a single currency but multiple economic policies. How can imbalance not occur under such a model?

Ireland should have had 10-15% interest rates to cool the boom in the early 2000s, yet the central control in Germany did otherwise. So the smaller economies will continually be at the mercy of the ECB that sets rates that are applicable to Germany and France. So its mega boom followed by mega bust for the smaller economies.

For the euro to work all the countries involved need to give up all monetary and economic powers to a central point. Taxes need to be equalised, regulations likewise. Budgets set and issued by the central authority. Taxes collected to a central point. 

A federal system is the only system that will allow the euro to succeed. This half hearted attempt at currency union is fundamentally flawed and there is no way of getting around that fact. 

Do the public of the member states want a federal state in order to keep their currency union?

It is not eurosceptic to argue that the fundamentals supporting the euro are its problem. Until these are resolved the currency simply cannot work.


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## Complainer (22 Jul 2011)

Duke of Marmalade said:


> Ireland's problems are political. The apparent economic imbalances can be solved at a stroke by cutting PS pay and Social Welfare to the levels of our nearest neighbour. Politically, we simply can't put into play these very obvious economic steps that would put us back on track.



You mean put they would put everyone except public servants or social welfare recipients 'on track'. It is meaningless to compare public sector pay and social welfare rates against the UK without looking at the big picture. Public servants and social welfare recipients in the UK have the NHS to suppoort them, with free primary health care, free prescriptions, no need to buy private health insurance unless you want a fancy room. Public servants and social welfare recipients in the UK don't buy school books, and in some areas still have free school meals. Public servants and social welfare recipients in the UK have lower car insurance and good public transport networks available. 

If you're going to do a comparison, do a proper comparison, not a selective one.


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## Duke of Marmalade (22 Jul 2011)

Complainer said:


> You mean put they would put everyone except public servants or social welfare recipients 'on track'. It is meaningless to compare public sector pay and social welfare rates against the UK without looking at the big picture. Public servants and social welfare recipients in the UK have the NHS to suppoort them, with free primary health care, free prescriptions, no need to buy private health insurance unless you want a fancy room. Public servants and social welfare recipients in the UK don't buy school books, and in some areas still have free school meals. Public servants and social welfare recipients in the UK have lower car insurance and good public transport networks available.
> 
> If you're going to do a comparison, do a proper comparison, not a selective one.


Fair points, but then again the UK is not a great benchmark, it is running its own massive deficits.


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## Complainer (22 Jul 2011)

Duke of Marmalade said:


> Fair points, but then again the UK is not a great benchmark


It was your benchmark, not mine


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