Who will fund deficit if we leave Euro

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.

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.

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

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.

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.

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

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.

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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.

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.)

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?

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?

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

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.

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.

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.

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?

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?

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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.

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.

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Can you expand on those two points please Sunny?

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 ?

Purple said:

Can you expand on those two points please Sunny?

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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.

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

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?