Would Leaving the Euro Help the Irish Economy?

[Cerr]

I'm pretty positive about the Euro but I thought this was an interesting opinion piece. I don't know that much about economics so I was wondering what others that do think of the idea.

http://www.independent.ie/opinion/columnists/david-mcwilliams/ditching-the-euro-could-boost-our-failing-economy-1729557.html

Ditching the euro could boost our failing economy
By David McWilliams

Wednesday May 06 2009

One of the things about crises is that they tend to blow the credibility of shibboleths out of the water.

A shibboleth is a mantra to which people get attached because it is easier than hard thinking. If enough people repeat the mantra it becomes gospel, and instead of using our heads, we exchange alleged truisms. Ireland's been exposed to enough shibboleths in the past five years to last us a lifetime.

One of these was "property only goes up". The second was "the fundamentals are sound" which, along with "this time it's different", are particularly costly mantras. We also got the "soft landing" shibboleth. Or what about the one last October, "our banks are well-capitalised"?

Well we all know where these mantras have landed us. If you are not aware what is going on in our country and you have access to the internet, have a look at the following clip of the unemployed queuing in Dublin on http://www.youtube.com/watch?v=Cf31q4TC790 Much has been made of this clip already, but it's worth looking at it again.

Yesterday, the 'Frankfurter Allgemeine' ran a story about how Limerick was like the third world, while the influential US magazine the 'Weekly Standard' devoted its front page to our woes at the weekend. Here in Australia, a waitress -- a second generation Irish Aussie -- asked me worriedly this morning: "Is everything okay in Ireland?", having just read a report in 'The Australian'. This was a reasonable question because, with unemployment rising at this level and tax revenue falling, there will come a time, not too far in the future, when Mr Lenihan will cross the corridor to Mr Cowen and tell him that we have "no money to pay the teachers next week".

Make no mistake about it, countries run out of money and if this happens in Ireland you can be sure another mini-Budget will be introduced and the State will expropriate whatever wealth it can to stay afloat.

This is when things get critical, and rather than putting a plan B in place for this event, the State is again clinging to a mantra rather than examining our options.

Anyone with a basic understanding of economics knows that we can't deflate our way to growth. The problem is a lack of demand. People are hoarding money. There is plenty of money in Ireland, but as we are hoarding, this money on deposit doesn't translate into cash spending.

Monetary policy in Ireland is broken. The banks are now too sick to play an active role in refinancing the economy, so therefore the economy continues to contract. As taxes rise, this has the same effect as taking cash out of people's pockets so we spend even less.

On top of this, we face the twin spectre of wages falling at a time when our debt burden is rising. Wages will fall because there are simply so many people on the dole prepared to work for less than their neighbour. The debt burden is rising because so many people who bought houses at the tail end of the boom on low interest rate deals are now facing those "enticement" rates rising.

What can we do about this? The obvious answer is to leave the euro, reinstitute our own currency, allow it to plummet to reflect the real competitive position of our ruined, feeble economy and start again. The vast majority of economists and commentators say this is not possible. In fact, they ridicule those who suggest that this might be worth entertaining.

Let me just remind you that the vast majority of economists and commentators believed the "soft landing" mantra. New ideas go through a cycle. First they and their proponents are ridiculed, then they are violently attacked and only then are they accepted as a universal truth. I suspect the same will happen to the idea of leaving the euro.

There are clearly issues with doing something as radical as this, as it would have to be coincident with a lifting of all state guarantees on interbank lending. The State could still guarantee deposits in the new currency. Many investors who owed the Irish banks or invested in Irish government bonds would get burned. But that is the nature of markets. They would be paid back in the new currency, which would have to find its value.

The new currency would fall rapidly, giving our trading sector a significant boost and making Ireland cheaper overnight for people to do business in. Clearly, the government deficit would have to be addressed through strict spending targets.

As the Central Bank would do what the US, UK, Australia, Canada and Sweden are doing now and print money, the liquidity trap that we are in would evaporate. Clearly inflation would rise rapidly, and the State would need to introduce CPI-linked bonds to refinance itself.

But lots of successful countries have done that in the past -- Sweden, Finland and Israel come to mind.

There are more than enough domestic savings to cover any government short-term shortfalls. In fact, inflation in Iceland, a country which embarked on a similar policy last September, shot up but has now collapsed. Clearly, the Irish banking system that gambled in Euro would be bankrupt. But banks are only institutions and maybe that's no bad thing because it would allow a new bank (or banks) to emerge. The price of land would fall dramatically even in the new currency but would find its level. After this, we could reboot the engine.

Unemployment would fall rapidly as it has done in practically every country which has embarked on such a policy. The Asian Tigers, after their collapse in 1997, are the best example of this rapid re-employment phenomenon. One look at the Asians or the Scandinavians should put paid to arguments about what small open economies can do.

We are already running a trade surplus and we'd run a bigger one. Our deposit base is significant. Clearly lots of money would flee the country initially, but it would come back as the domestic economy recovered quickly. Sure we'd have a lot of explaining to do politically, but we've to do that anyway.

There are other problems in terms of fairness. Young people with debts would benefit, middle-aged people with assets would lose out. But as most of the value of these assets will be wiped out in the grinding recession the next few years will bring, over a five-year period there might be no net change.

Obviously there are many other issues at stake, such as whether investors would re-engage with Ireland after a devaluation. Conventional wisdom says no. But conventional wisdom has been wrong from the start here.

I'll leave you with one example of this. In 1992, conventional wisdom said that if we devalued, the economy would implode, investors would take flight and we'd pay for years. In the event, we were forced to devalue and the economy boomed.

The one thing that scares investors most is a dying asset. No one will touch it. I don't know about you, but I'd prefer to live in a country that gives itself a chance of life, than one where the current policies can only lead to slow strangulation.

[The Brain]

I don't know about you, but I'd prefer to live in a country that gives itself a chance of life, than one where the current policies can only lead to slow strangulation.

I don't see how anyone can disagree with him.

[Iormlund]

So basically his proposal is to wipe out banks and scare away investors as the best way to avoid this recession, isn't it? Pretty much becoming Iceland Mk II. Or am I missing something here?

[Zanza]

Many investors who owed the Irish banks or invested in Irish government bonds would get burned. But that is the nature of markets. They would be paid back in the new currency, which would have to find its value.

Does that work? If an investor lended euro, he would demand to be paid back in euro too, right?

New ideas go through a cycle. First they and their proponents are ridiculed, then they are violently attacked and only then are they accepted as a universal truth.

That's only true for non-retarded ideas. Not sure if this is one of those.

[Cerr]

So basically his proposal is to wipe out banks and scare away investors as the best way to avoid this recession, isn't it?

It's far too late to avoid this recession but I think he's arguing that his proposal would help speed up the recovery.

Pretty much becoming Iceland Mk II. Or am I missing something here?

Does that have to happen? He gives examples of others doing something similar successfully:

Unemployment would fall rapidly as it has done in practically every country which has embarked on such a policy. The Asian Tigers, after their collapse in 1997, are the best example of this rapid re-employment phenomenon. One look at the Asians or the Scandinavians should put paid to arguments about what small open economies can do.

[MadImmortalMan]

I'm doing my part for the Irish economy. There's a six pack of Guinness waiting for me at home. 




I dunno about leaving the Euro as a solution here. I mean, clearly the needs of the Irish or Portuguese economies are different from the French or German, and maybe that merits some sort of localized or targeted strategies. The Germans and French sure as hell aren't going to just go along with deflating the Euro like crazy because Ireland needs it. But then again, federalism is like that. You get in knowing that there are risks and limitations of being in and some things are less flexible than being on your own would be.

[Cerr]

I'm doing my part for the Irish economy. There's a six pack of Guinness waiting for me at home. 

[Eochaid]

Leaving the Euro is retarded, Ireland would go down the drain faster that Iceland did.

Kevin

[DontSayBanana]

The author's missing his own point, accusing banks of "gambling," when he himself admits that there would be no guarantee investors would be willing to re-engage with a rebooted Ireland. Conventional wisdom be damned, a lot of investors would be screwed over and slighted by a sudden withdrawal from the Euro, and if you burn those investors, they will probably not be willing to enter into financial agreements again.

[Josquius]

You should rejoin the union :p

[Neil]

Isn't Ireland pretty dependent on the European Union?  Before the EU came along, Ireland was pretty much the worst place in the world.  Why would they want to screw around with that?

[Iormlund]

... a sudden withdrawal from the Euro...

Is such a thing even possible? As Sir Humphrey would say: "The ship of State is the only one that leaks from the top".
And the slightest rumor about such plans would trigger an immediate bank run and plunge the country into bankruptcy.

[Eochaid]

Isn't Ireland pretty dependent on the European Union?  Before the EU came along, Ireland was pretty much the worst place in the world.  Why would they want to screw around with that?

I live in Dublin () and a lot of people I meet put the whole Celtic Tiger thing down almost entirely to their own merit and dismiss EU aid as a footnote.

It's 'funny' to see how everyone here is downplaying EU aid. They built some kind of regional rail system called DART over the past few years and all the billboards say "Partially financed by the EU (85%)" Please note the difference in font size

Kevin

[Martim Silva]

Let me just chime in to say this: the only reason why Ireland hasn't gone bankrupt is because the Irish State guaranteed *every single cent* deposited in all the banks in the country.

This avoided a MASSIVE run on the Irish banks that would have led to instant financial collapse.

BUT Dublin only got away with it because it was in the Euro Area - its moves were done in a very large currency (the euro) and the market knew full well that the ECB and the European Governments would never let a member state of the Euro Area go bust. So, the deposits stayed in place (and Ireland was criticized for this, as in effect it forced many other states to adopt the same policy of ensuring all deposits).

Now, outside the euro, the chances of the Irish State to be able to repay the total sum of money deposited in the country's banks are precisely zero.

That means that all major depositers would try to get their money out of the country and into safer areas ASAP, before all the banks collapse. The Irish economy would last for about three days, tops. After that time period, it would turn into something that would make 1992 Russia look like Heaven on Earth.

[Neil]

Isn't Ireland pretty dependent on the European Union?  Before the EU came along, Ireland was pretty much the worst place in the world.  Why would they want to screw around with that?

I live in Dublin () and a lot of people I meet put the whole Celtic Tiger thing down almost entirely to their own merit and dismiss EU aid as a footnote.

It's 'funny' to see how everyone here is downplaying EU aid. They built a some kind of regional rail system called DART over the past few years and all the billboards say "Partially financed by the EU (85%)" Please note the difference in font size

Kevin

Seriously though, the Irish are offensive to me.