Should Ireland leave the euro and devalue the punt?

[Chris]

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.

Supply and demand on the free market would have decided the rate, it shouldn't be a conscious decision by a few people.
It is impossible, even in hind-sight to say when a free market would have reacted and in what way. If interest rates had risen in let's say 2000, due to increased demand, it would still have been possible for demand for credit to rise (as long as consumers were happy with it), resulting in higher propoerty prices and costs of credit. The point is that at some stage, and nobody knows where that stage would have been, market participants' demand for credit would have decreased. People will only pay as much as they choose to; if people are OK with higher credit costs then so be it.

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.

I'll reiterate a point I made before: credit based consumption is what caused this mess, building up savings and producing exportable goods will get us out of it. The reason people are not spending is because prices are too high. Keeping the prices high by making credit more easily available will cost us dearly in the long run. Essentially it amounts to keeping prices artificially high.
People will start spending again when they believe that the price is right. Again, it is impossible to say when that will be, maybe we need prices (for all goods/services) to go down another 10% maybe another 40%; at some stage though, consumers will enter the market again, and hopefully they will have saved the money they will spend.

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.

It wasn't a case of the ECB "looking after one or two States", the problem is that two states, Germany and France, make up such a huge proportion of the € economy. I don't have the exact figures, but it ultimately had the effect of reducing the €-zone wide inflation rate to a level that granted low interest rates. All the ECB did was try to keep the €-zone inflation rate as close to 2%, which is what it was set up to do. I'm no currency or banking expert, but it should have been clear to the financial world that you can have very large discrepancies in inflation rates between countries (within the €-zone), and that you cannot keep all of them adequately happy. However, politicians would lead us to believe that this is possible.

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).

You give no reason for why "it can't happen". Just two years ago people were saying that a lot of things "just can't happen": real estate collapse, construction collapse, credit collapse, banking collapse, country collapse.
All we kept hearing was:
1) "there will be a soft landing"
2) when this didn't happen it was "the fundamentals of the economy are sound"
3) then we were suddenly officially in a recession which prompted "we're the first country officially in a recession, which means that we will be the first country out of the recession"
4) this was also proven wrong (due to construction and banking system collapse) and things have now got worse

As someone posted earlier on this thread, we may find our selves leaving the € due to it being the ONLY solution left. Or it could happen that the € itself collapses. I admit that the likelyhood is slim, but pretty much everything can happen!

 

[Latrade]

You give no reason for why "it can't happen". Just two years ago people were saying that a lot of things "just can't happen": real estate collapse, construction collapse, credit collapse, banking collapse, country collapse.
All we kept hearing was:
1) "there will be a soft landing"
2) when this didn't happen it was "the fundamentals of the economy are sound"
3) then we were suddenly officially in a recession which prompted "we're the first country officially in a recession, which means that we will be the first country out of the recession"
4) this was also proven wrong (due to construction and banking system collapse) and things have now got worse

As someone posted earlier on this thread, we may find our selves leaving the € due to it being the ONLY solution left. Or it could happen that the € itself collapses. I admit that the likelyhood is slim, but pretty much everything can happen!

The ending of the Euro as a currency?

The obvious answer as to why it can't happen is because of how we've (across europe) attracted the foreign investment on the foot of a common currency. But that begs the question about the UK and others that don't. Well, they're kind of tollerated because they're a minority and even then the real trade is still done in Euro.

The Euro has allowed the EU to group together as a market and place for investment, the common currency has been a huge and signficant selling point. The global competition is too large for the EU to stand a chance of competing with all the hassle that goes with separate currencies and trade.

That's why it won't and can't happen.

I honestly think we are a long, long way off even considering leaving the Euro and devaluing currency. But hey, yeah, never say never. But be prepared for the loss of the likes of Pharmachem from these shores. Is it worth gambling 60% of GDP on the say so of one economist who got lucky and got one of his guesses right?

 

[Duke of Marmalade]

Chris, the problem with the argument that the market will find the correct interest rates is that we are in a zone of 300M people. Whose interest rates will the market find? In fact the interest rates were perfectly correct for Germans and we can assume that German rates would have been at that level with or without ECB intervention.

Now, interest rates in Ireland are indeed set by the market but they cannot differ very much from German rates because we are in a common currency zone. A lot of our borrowing was sourced by international interbank lending and no matter how rapacious the Irish appetite for credit we were never going to make a significant dent in the overall cost of euro credit.

 

[Chris]

The Euro has allowed the EU to group together as a market and place for investment, the common currency has been a huge and signficant selling point. The global competition is too large for the EU to stand a chance of competing with all the hassle that goes with separate currencies and trade.

That's why it won't and can't happen.

I agree that there would be a hassle involved in trading in separate currencies, but this was not an issue before the € and I don't believe that the introduction of the € increased trade between Eurpoe and the rest of the world.
The best productivity based boom times were seen after WWII when every country had its own currency. In mordern banking systems currency exchange is not a problem, the only problem is fluctuating exchange rates within Europe; the rest of the worl has to convert to/from € anyway.

I honestly think we are a long, long way off even considering leaving the Euro and devaluing currency. But hey, yeah, never say never. But be prepared for the loss of the likes of Pharmachem from these shores. Is it worth gambling 60% of GDP on the say so of one economist who got lucky and got one of his guesses right?

A country that devalues its currency is not less attractive to foreign investment per se. While the assets that foreign companies would already own in that country would devalue, their production costs and costs of acquiring new assets would also go down, allowing them to achieve higher gross profits. It would be certainly have a very short-term impact on their business operations, but they would also immediately see the profit potential of paying their staff in a devalued currency.
The more immediate problem would be to domestic producers of goods that require the import of natural resources that cannot be produced in Ireland.

Chris, the problem with the argument that the market will find the correct interest rates is that we are in a zone of 300M people. Whose interest rates will the market find? In fact the interest rates were perfectly correct for Germans and we can assume that German rates would have been at that level with or without ECB intervention.

Now, interest rates in Ireland are indeed set by the market but they cannot differ very much from German rates because we are in a common currency zone. A lot of our borrowing was sourced by international interbank lending and no matter how rapacious the Irish appetite for credit we were never going to make a significant dent in the overall cost of euro credit.

I agree, Irish property buyers wouldn't have made a dent in the €-Zone wide credit market on their own. However, at the same time as the Irish proporty bubble was expanding, borrowing was drastically expanding in France and Germany as well; not private citenzens borrowing, but large multi-national corporations. This should have resulted in higher interest rates as overall the supply for credit was expanding throughout the €-Zone.
This brings me to a point I made in a previous post, just changing from a central banking system to a free banking system is not enough. At the same time the money supply has to be fixed and based on 100% backing of some sort. In this case even a small country would have a noteable, albeit small, impact on credit demand of a limitied commodity, as the money supply is fixed and cannot be increased.
Money, in most ways is just like any other commodity. However, it has the very unique property that it is not used up by consumption, and therefore any increase in the supply will always have a negative impact on the long-term supply-demand balance.
Your post highlights very well the danger that a central banking system poses to small economies like Ireland. As mentioned before, Ireland leaving the € and setting up another central fractional reserve banking system of a fiat currency is just like telling a heroin addict to switch to cocaine to solve his addiction problem.

 

[Duke of Marmalade]

While the public finances may be near to "bankruptcy", the nation is not.

I really can't figure this one no matter how I try. Protocol is correctly quoting from the ESRI forecast that we will be in BoP surplus in 2010. But this makes a lie of many of the soundbites:

1. We are living beyond our means. No, not if BoP is in surplus, and remember this is without the massive EU transfers which we needed in the past.

2. We must accept a lower standard of living. Again, no, not if we are paying our way internationally.

3. We are borrowing €400M a week. Emphatically no. As a nation we are net acquirers of international financial assets, that's what a BoP current account surplus means. The government is borrowing massively but clearly that is from its own citizens, or if it is from foreigners it is being more than compensated by Irish citizens investing/lending abroad.

4. We have crippling international indebtedness. We undoubtedly have a massive personal sector/banking sector international indebtedness but if the BoP is in surplus we are finding no difficulty servicing it.

What am I missing here? I can only think that maybe the BoP is one massive illusion. This could happen if Irish domiciled multi-nationals are accumulating financial assets in Ireland - and Irish citizens are themselves not in surplus. The day of reckoning would then come when these funds are repatriated.

Some economist (not DMcW) please help.

 

[flattea2]

I have argued before for taking back the punt and making our own decisions, however that only works in a rational political system. Unfortunately our system is largely self interested so tends to make decisions which are politically popular. By having the Euro we force ourselves to make hard decisions (ie the wage cuts coming to the public sector, and social welfare cuts).

The issue is that in good times we overspend in every area rather than saving for a rainy day. The government buys the next election and destroys the economy long term. It is easy now though to say take back the punt and feic Europe. Wage cuts now are the natural econonic decision to take as wages have been hyper-inflated for a good 7-8 years.

We have an corrupt political system though, that is the main problem. And remember, most of the FDI in Ireland is because of our membership of the Euro. It is easy and convenient now to say lets ditch the Euro.

 

[Protocol]

I really can't figure this one no matter how I try. Protocol is correctly quoting from the ESRI forecast that we will be in BoP surplus in 2010. But this makes a lie of many of the soundbites:

1. We are living beyond our means. No, not if BoP is in surplus, and remember this is without the massive EU transfers which we needed in the past.

The BoP may be in surplus during 2010, meaning that the GDP income of the nation exceeds the expenditure on consumption, investment goods and govt purchases (C + I + G).

This means that as a nation we are a net saver, running a small external surplus.

However, we may still have foreign liabilities greater than our foreign assets.

2. We must accept a lower standard of living. Again, no, not if we are paying our way internationally.

3. We are borrowing €400M a week. Emphatically no. As a nation we are net acquirers of international financial assets, that's what a BoP current account surplus means. The government is borrowing massively but clearly that is from its own citizens, or if it is from foreigners it is being more than compensated by Irish citizens investing/lending abroad.

Correct.

4. We have crippling international indebtedness. We undoubtedly have a massive personal sector/banking sector international indebtedness but if the BoP is in surplus we are finding no difficulty servicing it.

I'm not very confident talking about this, but yes, the banking sector has huge foreign liabilities. I suppose you are right in that the banks seem to be able to service these debts.

But won't the huge domestic bad debts put the banks under pressure? Isn't that where NAMA comes in? The banks will swap loans for NAMA bonds, while trying to service foreign liabilities?


What am I missing here? I can only think that maybe the BoP is one massive illusion. This could happen if Irish domiciled multi-nationals are accumulating financial assets in Ireland - and Irish citizens are themselves not in surplus. The day of reckoning would then come when these funds are repatriated.

I don't know. It is so complex.

Some economist (not DMcW) please help.

 

[Protocol]

Maybe these CSO documents will help to explain things.

This is our international investment position as of the end of 2008:

[broken link removed]


This is our external debt:

[broken link removed]


Both taken from here: [broken link removed]

 

[Duke of Marmalade]

Thanks Protocol. That's an awful lota figures. But when I see Net Errors and Ommissions of €8Bn in a quarter and when one considers the enormous impact of the IFSC, it is really difficult to assess the true underlying position.

There was a time that the BoP meant everything. I can only assume that with the silence surrounding this apparently good news story, the BoP is no longer as relevant as it was.

 

[FAUGH45568]

Think like a company..

Nama --- Paying this back with revenues falling, unemployment rising, property price falling...
Budget Cuts-- need to see follow through not promises on Cuts.. If we continue to tax our way out of this as well, we will grind lower.
Still Uncompetitive---No matter what way you look at it we Irish are too expensive, however high unemployment rates will sort this out..
International--- Dubai incident should be a warning to anyone that the Credit Crisis is far from over, also a few indicators flashed to let us know how we are still viewed in the international community...Make no mistakes about it we are not viewed well! We talk the talk but we do not walk the Walk..

We are continuing down a slippery sloep and imho that slope is getting steeper..

nama, banks, guarantee our debt liability will IMHO cause us to default.. This wont happen over night but just like Dubai we will wake up one morning and we will be asking ourselves what the hell happened.. Dubai is a pebble in the Ocean.. dont wait for the Nuclear Bomb..

 

[Towger]

dont wait for the Nuclear Bomb..

y
So what is the Nuke? Rising interest rates along with a lack of action by the goverment etc, or Hyperinflation which should in the long run solve out debt problems ?

 

[kerryjo]

I listened to David McWilliams at the Irish Skeptics last night. He ego-tripped for around an hour on the interesting people he met and corrected and the funny incidents and how right he was and how unpopular he now is for what he said about Miriam O'Callaghan. He spent around 5 minutes of the total time making the following two points.

1) There are three stages in the "system's" reaction to visionaries like himself:

• Ridiculing of the idea
• Aggressive attacks on the idea
• Adopting it as conventional thinking

2) No other country in the same mess we are in has got out of it, except by devaluing their currency. We have to devalue our currency.

Devaluing the currency forces a reduction in salaries on all of us and devalues our expectations. The alternative is social chaos as the government tries to slowly "grind" a 20% pay cut on us all.

Unfortunately, that was as far as he went.

Listening to him, it was quite clear that we must devalue our currency. The people who run the country and their economic advisors have no idea what they are doing. Argentina refused to devalue, and then after 4 years, they devalued and started booming again.

No other economist in Ireland worth their salt, disagrees with him. Or maybe, all the other economists know this.

I spoke from the floor along the following lines:
His argument seemed coherent to me, but I am not an economist
I would like to hear the other side of the argument.
I would like to hear the point of view of Alan Ahern and Patrick Honohan. I asked if he respected them and he said that they did.

His response was that his record shows that he has been right all along, so by implication, he is correct now as well.

Another questioner said that devluation was a good idea, but it would never be agreed as none of the three big parties supported it. Mc Williams correctly countered that none of the big parties supported free trade until Ken Whitaker proposed it. And eventually they agreed.

Another questioner asked what the downsides were. Mc Williams replied that there would be some pain, but not nearly as much pain as we will experience doing it the slow way.

No Way, Jose. Being part of Europe allows companies economic stability to provide me with employment and allows innovative companies abroad to compete for my business. Leaving the Euro would be a step back to DeValera Economics.

 

[lostbiker]

Guys,
Ireland leaving the Euro will not happen overnight and luckily for you and thanks to the recent example "Greece" the EU has learned a lesson, but didn't find a solution!
The question however is: what is Ireland's contribution to the EU economy? Is there any real production of goods of any kind (except silicon;-).
All countries in EU have similar problems - they either do not produce anything physical at all 'cause cost effectiveness or produce "something" at high risk (i.e. electronics or cars).
What is nowadays really "Made in Ireland" with significant contribution to the countries income?
What is the plan going forward - how to make Ireland more attractive for further development considering the EU competition?