Should Ireland leave the euro and devalue the punt?
- Thread starter Brendan Burgess
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A few comments:
1. There were a few months in late 2008/early 2009 where Ireland could only borrow money from the ECB. Would we not have went bankrupt if the ECB decided not to lend us the cash at that time?
2. As far as I'm aware (correct me if I'm wrong), no country with the euro has had to be bailed out by the IMF but those EU members outside the euro club (e.g. Latvia, Hungary) have got assistance from the IMF.
3. The long term effect of all the current government borrowing is if interests rates move up drastically. Argentina had borrowings of ~110 billion and they defaulted when interests rates hit ~16-18%. By the way, the international community is now lending again to Argentina - their paying a good interest rate!
4. Before Argentina broke the link with the US dollar, the peso was trading at 1:1. After they broke this link (their devaluation), within a few weeks they needed three pesos to purchase one US dollar. In the 90's most homeowners took out morgages in dollars as the interest rate was a percent or two lower that borrowing in the peso. After devaluation, they still had to pay their morgage in dollars!
The way I see it, if there is a sustained recovery in the global economy, we can get out of the mess we're in but it's still going to hurt. On the otherhand, if the global recovery is very very slow, we may need to default and leave the euro. As DMcW says, it may be unthinkable today to leave the euro, but in a few years time it could become a necessity. The argenine economy hit the rocks in ~'98, they borrowed heaps of money and made big cuts to public spending and it was in ~2002 when they finally defaulted on their international debt and devalued their currency.
1. There were a few months in late 2008/early 2009 where Ireland could only borrow money from the ECB. Would we not have went bankrupt if the ECB decided not to lend us the cash at that time?
2. As far as I'm aware (correct me if I'm wrong), no country with the euro has had to be bailed out by the IMF but those EU members outside the euro club (e.g. Latvia, Hungary) have got assistance from the IMF.
3. The long term effect of all the current government borrowing is if interests rates move up drastically. Argentina had borrowings of ~110 billion and they defaulted when interests rates hit ~16-18%. By the way, the international community is now lending again to Argentina - their paying a good interest rate!
4. Before Argentina broke the link with the US dollar, the peso was trading at 1:1. After they broke this link (their devaluation), within a few weeks they needed three pesos to purchase one US dollar. In the 90's most homeowners took out morgages in dollars as the interest rate was a percent or two lower that borrowing in the peso. After devaluation, they still had to pay their morgage in dollars!
The way I see it, if there is a sustained recovery in the global economy, we can get out of the mess we're in but it's still going to hurt. On the otherhand, if the global recovery is very very slow, we may need to default and leave the euro. As DMcW says, it may be unthinkable today to leave the euro, but in a few years time it could become a necessity. The argenine economy hit the rocks in ~'98, they borrowed heaps of money and made big cuts to public spending and it was in ~2002 when they finally defaulted on their international debt and devalued their currency.
If we didn't have a "lender of last resort" in form of a central bank or government, we wouldn't have the problems we are seeing now. Banks would have been too scared of actually facing bankruptcy.
If Ireland left the € and then wound down the Irish Central Bank's powers to set interest rates, then we wouldn't need a "lender of last resport". The idea of needing a lender of last resort only came into existence with the total abandonment of 100% reserve banking.
Is there any possibility of the control of interest rates to be temporarly transfered back to the Irish Central Bank for a period of 3-5 years?
If the government could give a commitment to keep interest rates low, it would make it easier for people to accept a lower standard of living.
If things improve in the economy, rates could be adjusted to ECB levels (assuming they have risen in the meantime).
If the government could give a commitment to keep interest rates low, it would make it easier for people to accept a lower standard of living.
If things improve in the economy, rates could be adjusted to ECB levels (assuming they have risen in the meantime).
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It is too low interest rates and too much borrowing that created this mess. How is more of the same going to possibly solve it?
Yes, but if the government could keep rates low it would give it more scope to cut salaries in the civil service or introduce a property, for example. Therefore wages would come down but if monthly mortgages stayed low in the medium term it would help ease the pain. When thing improve in a few years they can increase the rate.
It is not allowed for the ECB to lend directly to Govts. This has not, and does not happen.
The ECB has not lent the Irish Govt any money, nor will they.
On a related note, we are not borrowing from the ECB for NAMA.
It's comm banks that borrow from the ECB.
That's one of the big problems with a devaluation, esp as we have a lot of foreign liabilities.
This does not solve the problem, but fuel it. It would be like telling a recovering drug addict to take drugs once in a while to 'ease the pain'. The bigger problem is that it is impossible to objectively quantify what an 'improved' situation would be that should trigger higher rates.
Reducing the pay of the entire public sector is very unfair as it affects the absolutely essential parts of the public service (guards, military, health care and education). The only fair way would be to get rid of all government agencies, committees, back office administrative offices etc. and leave the rest unaffected.
Duke of Marmalade
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I stand corrected, Protocol. But this forecast of the ESRI is really hard to believe. By definition, the ultimate test of an exchange rate is that it achieves the correct BoP. By these projections the exchange rate looks just about right. But I do not believe that - not after a 40% appreciation against sterling. The ESRI is forecasting a huge fall in imports in 2010 compared to exports. I would love to see the breakdown of that for our trade with the UK. I suppose it could be positive if the big increase in the volume of our imports from there (witness border queues) does not counter the big drop in the prices, but it would also need our exports to hold up even though they are 40% dearer.
Why does the government not give much more prominence to this very positive aspect of our macro economic position?
Why is everybody saying we have a problem with competitiveness?
It has been covered in other posts but the argument of leaving the Euro and devaluing the punt is a typical Macro Economist outlook.
The thing we have to consider is that around 60% of GDP comes from 50 or so companies in the country, all foriegn owned. They can't have been more vocal in their position on why they are still in Ireland and though the cost is a burden, the position of Ireland as a gateway to the European market is significant. Will changing currency affect this? Well even if it only means a few relocate, that's a massive hit.
Both Iceland and Argentina aren't really case studies on the positive, but also aren't case studies because they weren't so dependent on foriegn investment. Also, Argentina's downfall was independent of a huge Worldwide issue. Whereas for us we're competing with every one else, letting the country slip even further back may present some semblence of a short-term fix, but in the long term we'll be so far behind we'll never really recover. Ok we'll never be where we would have been in 10 years, but we can still be comparable with everyone else.
The best example is the UK. As far as our media are concerned the UK's strategy is something of a model we should have followed, but this is nonsense, all the UK has done is deferred the pain that has to be taken. The only area to really benefit from reduced VAT is the North mainly because it is us who've utilised the cut, the rest if the retail sector in the UK is still perilous. While it has also affected us in terms of exports, it isn't sustainable, they're still importing and it hasn't really boosted their own manufacturing. And depending on what urgent action the UK takes in the next budget (serious cuts on public spending and increased taxes and more than we had and have to take because they left it so long) it may actually result in inflation in the UK.
The thing we have to consider is that around 60% of GDP comes from 50 or so companies in the country, all foriegn owned. They can't have been more vocal in their position on why they are still in Ireland and though the cost is a burden, the position of Ireland as a gateway to the European market is significant. Will changing currency affect this? Well even if it only means a few relocate, that's a massive hit.
Both Iceland and Argentina aren't really case studies on the positive, but also aren't case studies because they weren't so dependent on foriegn investment. Also, Argentina's downfall was independent of a huge Worldwide issue. Whereas for us we're competing with every one else, letting the country slip even further back may present some semblence of a short-term fix, but in the long term we'll be so far behind we'll never really recover. Ok we'll never be where we would have been in 10 years, but we can still be comparable with everyone else.
The best example is the UK. As far as our media are concerned the UK's strategy is something of a model we should have followed, but this is nonsense, all the UK has done is deferred the pain that has to be taken. The only area to really benefit from reduced VAT is the North mainly because it is us who've utilised the cut, the rest if the retail sector in the UK is still perilous. While it has also affected us in terms of exports, it isn't sustainable, they're still importing and it hasn't really boosted their own manufacturing. And depending on what urgent action the UK takes in the next budget (serious cuts on public spending and increased taxes and more than we had and have to take because they left it so long) it may actually result in inflation in the UK.
Isn't the main reason that our exports have stood up so well is the growth in the pharmaceutical industry which are driven by US multinationals. This growth offset the weaknesses in other traditional export sectors such as food, computers etc. So the competiviness issue is still relevant. It just gets hidden if you look at the headline figure.
Protocol, I'm a layperson when reading a country's accounts but I note the following:
Balance of Payments Current Account (€m)
2007:-10,128.0
2008:-9,439.0
2009:-1,692
2010:+2,390 (my "+", just for clarity)
This suggests that when "times were good" we were net importers.
When the recession hit, we flipped, massively stopped importing.
The figures point to the 2008-2009 interface as the time of the flip.
Since then we've continued this trend, which is ongoing at a slower rate.
In other words the issue of the positive integer, while it marks a point on the road, shouldn't be taken as suggesting the journey has changed direction, or that its the same journey we went on circa ten years ago when the figures were last like this.
In terms of an indicator of the economy, we'd need to go back to when our BoT was similar, which from a vague memory I have in my head from some economic programme was in 2000-2002.
However while the figures then and now may look superficially similar, the above figures in my layperson's opinion, do not say the same thing at all as the indicators from a decade ago.
A decade ago was when the latest bubble in the economy started to rise and when we were competitively priced in the world. It showed a genuine level of competitiveness and selling abroad.
The current ESRI figures just show that we have stopped spending on imported goods, as opposed to our exports exceeding our imports for all the right reasons.
I think that the current positive integer figure should be set it in its current context - a general retraction in buying foreign goods and services - and seeing the different context of the previous time when - on the surface of things - similar figures might have existed.
Things were different a decade ago, both in terms of what the actual figures mean and the journey the country has gone through since then.
Even were all things the same in terms of external competitiveness, we wouldn't be facing onto a building boom, because all the houses are built now and the incentives are going away.
While the positive integer seems to be an indicator that the balance of payments has turned, that credit is coming back under control in Ireland, that we are no longer splurging on foreign products, I think its pointing to something else - a continuation of the current corrective trend
This trend itself might not be the result of positive indicators, it might just be a reflection of the lack of available credit generally, or the cost of credit.
I think it points [in part] to the failure of the car industry, which is a constant source of foreign spending, and this points directly to Bank policy on personal loans, not to prudent fiscal policy by our population.
So by all means welcome any improvement in the figures, but let's analyse them to see what the might mean, as opposed to cheering the positive integer.
I'm not trying to be a wet blanket or in any way critical of you Protocol - because I thought exactly the same thing when I read it first.
But looking down the rest of the figures, instead of a raft of positive indicators, I saw rising government debt, employment and the ECB rate.
I saw all the other indicators still in free-fall, although the rate of fall had lessened, i.e. the curve was flattening out in 2010.
The positive integer therefore seems to be a sign of the lack of available credit and an economy in crisis correcting itself.
As I said, I'm a layperson on macro-economics, but when something like this jumps out at you it needs to be said.
ONQ.
As a novice in this area, Is there a flaw in having a common interest rate for a large group of countries?
The ECB set interest rates low at the start of the decade which helped fuel the proprty bubble. Now it is possible in a year or two, if the bigger eurozone countries recover quicker than us, interest rates will rise and this would hamper any recovery here. I'm just wondering if the interest rate set by the ECB may not actually suit every individual country.
The ECB set interest rates low at the start of the decade which helped fuel the proprty bubble. Now it is possible in a year or two, if the bigger eurozone countries recover quicker than us, interest rates will rise and this would hamper any recovery here. I'm just wondering if the interest rate set by the ECB may not actually suit every individual country.
Yes, fair point. I did make too much of a generalisation.
This is a perfectly correct point. It is impossible for one central body to accurately quantify the needs/wants of any large body of people. Even if the central bank were only decing the rates for one tiny country, this is an impossible feat to get right all the time.
My point being, that interest rates should not be dictated by a central body but by the market in the form of supply of and demand for credit.
Here is an example of how it should work:
1) increased demand for property results in increased demand for credit and an increase in property prices
2) the increased demand for credit in turn would result in increased cost of credit
3) at some point the increased cost of credit will lead to a decreased demand for credit
4) resulting in a decreased demand for proporty and lower property prices
Ultimately the market forces of supply and demand dictate what market aprticipants accept
Here is how it currently works with central banks setting interest rates:
1) increased demand for propoerty results in increased demand for credit
2) due to some political pressures and lobbying central banks keep rates low
3) this exacerbates demand for credit and prices rise even more
4) eventually a self perpetuating bubble mania is created
Interesting point Chris. So ideally our interest rates should have been increased in the early 2000's to keep house prices down and reduce the demand for higher wages.
Would lower interest rates for the next couple of years be a good thing now though to encourage people to spend? There seems to be some evidence that people are saving more.
Would lower interest rates for the next couple of years be a good thing now though to encourage people to spend? There seems to be some evidence that people are saving more.
That was a major issue for us (and other states), that because of problems in Germany and France, rates were kept low and it facilitated the property boom.
Now I'll admit I haven't really done a detailed check, but did McWilliams call for us to leave the Euro Zone when we were benefitting from it so much? I don't mean point out the pitfalls, but actually state we should withdraw?
However, one positve is that because other States found themselves in a similar situation, I don't see the ECB being as gung ho with looking after one or two States and basing it on their finances. I'm probably way too optimistic, but I think a lot has been learned from the boom years at a centralised level.
The other issue is to have interest rates set locally would have to mean the complete end of the Euro. Not only won't this happen, but it can't happen. Again we rely so much on being the gateway to the European Market, any disruption to that (i.e. going back to individual currencies) will be far more devistating than a controlled rise in interest rates (which is inevitable).