Anyone read Mcwilliams new book and agree with his alternative to the current mess?

SkepticOne

nesf wrote: »

Depends on a host of factors but yes a one-size-fits-all approach isn't going to be as good as individual interest rates however you can't have two countries using the same currency with different interest rates so it's one or the other.

Which is, of course, the point I was making.

nesf

SkepticOne wrote: »

Which is, of course, the point I was making.

Indeed however it begs another question: will two economies start slowly converging in economic cycles when under a common interest rate regime?

SkepticOne

nesf wrote: »

Indeed however it begs another question: will two economies start slowly converging in economic cycles when under a common interest rate regime?

My own opinion on this (and it is separate from the other arguments) is that some economies, let us call them core economies, will converge further and others (peripheral) will diverge further. It will have both effects. I can't find any literature to support this but the argument would be that if the core economies are sufficiently integrated then monetary policy will be operated in order to smooth out booms and busts. However in countries that are not sufficiently integrated to start with, this same policy will have the effect of exaggerating booms and busts and these exaggerated booms and busts will be 180 degrees out of phase with the those of the core economies. Thus, Ireland may be undergoing a massive boom while Germany is having a minor slump etc.

Note that this speculation of mine is peripheral to any arguments being made to the advisability of Ireland staying in the Euro.

nesf

SkepticOne wrote: »

My own opinion on this (and it is separate from the other arguments) is that some economies, let us call them core economies, will converge further and others (peripheral) will diverge further. It will have both effects. I can't find any literature to support this but the argument would be that if the core economies are sufficiently integrated then monetary policy will be operated in order to smooth out booms and busts. However in countries that are not sufficiently integrated to start with, this same policy will have the effect of exaggerating booms and busts and these exaggerated booms and busts will be 180 degrees out of phase with the those of the core economies. Thus, Ireland may be undergoing a massive boom while Germany is having a minor slump etc.

Note that this speculation of mine is peripheral to any arguments being made to the advisability of Ireland staying in the Euro.

Yeah but without empirical evidence you're just guessing. No offence meant.

SkepticOne

nesf wrote: »

Yeah but without empirical evidence you're just guessing. No offence meant.

I fully accept that and no offence is taken. Do you think that membership of of a common currency brings about convergence in economies? How do you get around the problem that I have raised in the above post?

nesf

SkepticOne wrote: »

I fully accept that and no offence is taken. Do you think that membership of of a common currency brings about convergence in economies? How do you get around the problem that I have raised in the above post?

Are the problems you raise real? Relationships between countries do change with currency/interest rate union, evidence for this varies but one of the clearest examples I've seen is the change in import elasticities between countries:

A country's imports varies with economic growth, in a shrinking economy imports fall and vice versa. What changed in the Eurozone was this relationship. Ireland exports more to Germany now than it did when the countries were using different currencies, for the same percentage shrinking of the German economy. In other words, the amounts of exports we lose when the German economy shrinks is less than it was when we had different currencies. This is a fundamental change in relationship between the two countries and indicative of how you can't continue thinking of the relationship between the two countries in the same way you would with two independent countries currency wise.

nesf

Article in the latest Economist on default possibilities in the Euro Zone (and a side mention of the troubles of leaving it): http://www.economist.com/displaystory.cfm?story_id=15016124

SkepticOne

nesf wrote: »

This is a fundamental change in relationship between the two countries and indicative of how you can't continue thinking of the relationship between the two countries in the same way you would with two independent countries currency wise.

I don't think there are no converging effects, what I would wonder though is whether these are sufficient to overcome what I believe to be a divergent tendency due to a common interest rate policy.

Would you agree the same interest rate in an overheating economy as an economy in recession is likely, other things being equal, to bring about a divergence of some sort?

Flamed Diving

SkepticOne wrote: »

I think the normal theory is that a competitive country with a positive trade surplus will generate demand for its currency and this will drive up its value. Similarly a trade deficit will have the opposite effect. I don't think this is particularly controversial.

Note that I'm not saying that this is the only factor, just that it is a factor. I'm sure most people are aware that the likes of printing money or a government buying up another countries currency directly will have an effect.

Well this is what I was going to come back with, but I think you should weaken the "tends to" element of your analysis. Currency movements happen for good as well as bad reasons, in both directions.

SkepticOne wrote: »

I don't think this is a reasonable question. I don't think it is possible to know in advance what the correct interest rate should be though you could well have an idea that it should be higher or lower than it currently is.

Not only is it a reasonable question, it is a crucial one. Having significantly lower rates than the Eurozone will lead to capital outflow. Having them too high, well, that is apparently the problem now, right? So this is something you would want to be spot on with.

SkepticOne wrote: »

I don't think a particular level should be aimed at. Artificially trying to maintain a level is what leads to currency crises, e.g. Black Wednesday already mentioned.

So the government shouldn't mind if the Punt falls 20%? 40%? 70%?

Let's say it falls 20%, which will not only have a devastating effect on banks and businesses with debts in Euro, but will (as Scofflaw pointed out) wipe out any forecasted benefit from competitiveness.

I think the government should give a damn about the level their currency takes, especially after just floating it on the market. Why do you keep ignoring the Euro debts of local businesses? This is by far the biggest hole in your logic. If your plan was implemented, the economy would be finally killed off.

SkepticOne wrote: »

No one is denying that these other factors don't exist and should not be dealt with, so I'm not sure of the relevance of this question.

Leave Euro = Improve competitiveness. Yet many of the reasons people don't invest here are not tied to this decision meaning that your policy may have little or no positive effect, with all the bad outcomes listed above. The exchange rate is likely to be lower down on the list than some of the more structural problems Ireland has. That's why it is relevant.

Flamed Diving

CURRENCY BOARD OR CENTRAL BANK?
Lessons from the Irish Pound's Link with Sterling, 1928-79
Patrick Honohan

http://homepage.eircom.net/~phonohan/BNL.pdf

For those interested in Ireland's currency history written by the current Central Bank governor.

nesf

SkepticOne wrote: »

I don't think there are no converging effects, what I would wonder though is whether these are sufficient to overcome what I believe to be a divergent tendency due to a common interest rate policy.

Would you agree the same interest rate in an overheating economy as an economy in recession is likely, other things being equal, to bring about a divergence of some sort?

It's an open question which is my point and one that would need to be answered before any real debate on leaving the Eurozone can begin.

SkepticOne

nesf wrote: »

It's an open question which is my point and one that would need to be answered before any real debate on leaving the Eurozone can begin.

You would think there would have had to be some sort of consensus on the issue before embarking on the experiment.

nesf

SkepticOne wrote: »

You would think there would have had to be some sort of consensus on the issue before embarking on the experiment.

There could be no such consensus, it had never been tried before on this scale. There was a lot of debate about whether it would even last 2-3 years!

SkepticOne

nesf wrote: »

There could be no such consensus, it had never been tried before on this scale. There was a lot of debate about whether it would even last 2-3 years!

I would not expect there to be much empirical evidence for the reasons you outline, but I would have expected there to be some sort of consensus based on theoretical considerations, some sort of reasoning based on fairly well established principles.

nesf

SkepticOne wrote: »

I would not expect there to be much empirical evidence for the reasons you outline, but I would have expected there to be some sort of consensus based on theoretical considerations, some sort of reasoning based on fairly well established principles.

It's hard to have a theoretical framework for something that's never happened when you're dealing with chaotic systems.

recedite

SkepticOne wrote: »

...and a large part of the cause of this has been inappropriately low euro interest rates during a massive housing bubble..However staying in a currency union suited for much stronger economies could also be considered fiddling, interfering with the normal market processes.

Now that the bubble has burst, we only have to lower our wage costs to harmonise with the European monetary union. The benefits of living in a stable economy are not far away, so why pull out now when we are nearly there? (this despite the meddling of the Irish government over the last few years with benchmarking and other inflationary policies)
The remit of the ECB is to keep eurozone inflation at or below 2% so that business can operate in a stable predictable environment.
The idea that the euro is too "strong" for us is like saying it is too good...theres no such thing.

Flamed Diving

recedite wrote: »

The idea that the euro is too "strong" for us is like saying it is too good...theres no such thing.

What do you think people mean when they say this?

recedite

SkepticOne wrote: »

Would you agree the same interest rate in an overheating economy as an economy in recession is likely, other things being equal, to bring about a divergence of some sort?

Its a good point.However you have to consider that the impetus for that initial wild swing was only a once-off effect (our interest rate reduction to eurozone levels). At this stage the pendulum has swung, and both Ireland and Germany have gone into recession. Now the dampering effect of currency union comes into play, taking the momentum out of any wild swing in our economy which is out of sync with the core economies. In my opinion, the next phase is one in which we all return to modest growth simultaneously.The overall stability will have increased in direct proportion to the increase in size of the eurozone. Similarly the strength of the currency will have increased. The euro will float in an even more "cumbersome" manner.

View

Personally, I think people are viewing the issue incorrectly when they talk of an "Irish economy" and a "German economy" (etc.).

With the advent of the Euro, there is A Eurozone economy. The "Irish economy" and the "German economy" do not exist as independent units detached from the Eurozone economy. As such, the pre-Euro view, that continues to be used, of these economies as being separate form each other is just wrong. It is akin to talking of the "Clare economy" and the "Kildare economy" as though they had separate with nothing to do with each other.

Consequently, I suspect we need to do a mental "flip" to place the idea of a Eurozone economy at the centre of our thinking and all issues related to the budget, should be viewed with the question "How does this improve our relative position within the Eurozone?"

To see what, I mean, consider the inflation from Eurostat which applied to the period 1997-2008. During this time, according to Eurostat, inflation in Ireland ran at double the Eurostat average. As such, we were well on our way to a finacial crisis even if if there was no global crisis to worry about.

nesf

View wrote: »

Personally, I think people are viewing the issue incorrectly when they talk of an "Irish economy" and a "German economy" (etc.).

With the advent of the Euro, there is A Eurozone economy. The "Irish economy" and the "German economy" do not exist as independent units detached from the Eurozone economy. As such, the pre-Euro view, that continues to be used, of these economies as being separate form each other is just wrong. It is akin to talking of the "Clare economy" and the "Kildare economy" as though they had separate with nothing to do with each other.

Consequently, I suspect we need to do a mental "flip" to place the idea of a Eurozone economy at the centre of our thinking and all issues related to the budget, should be viewed with the question "How does this improve our relative position within the Eurozone?"

To see what, I mean, consider the inflation from Eurostat which applied to the period 1997-2008. During this time, according to Eurostat, inflation in Ireland ran at double the Eurostat average. As such, we were well on our way to a finacial crisis even if if there was no global crisis to worry about.

Eh, fiscal policy varies wildly between Eurozone economies which complicates it a lot more than you make out. Clare and Kildare are subject to the same income tax rates, VAT rates etc. Ireland and Germany aren't.

ei.sdraob

View wrote: »

To see what, I mean, consider the inflation from Eurostat which applied to the period 1997-2008. During this time, according to Eurostat, inflation in Ireland ran at double the Eurostat average. As such, we were well on our way to a finacial crisis even if if there was no global crisis to worry about.

few points on this:

* the EU & ECB did warn us for years, but the party answer was "to go and commit suicide" to anyone who was "ruining" the orgy, or just ignored

* Property assets are not included in any inflation measure, if they were then alarm bells would have been ringing much louder, its insane to think that the biggest thing a person would buy in their life is not included in inflation figures

SkepticOne

nesf wrote: »

Eh, fiscal policy varies wildly between Eurozone economies which complicates it a lot more than you make out. Clare and Kildare are subject to the same income tax rates, VAT rates etc. Ireland and Germany aren't.

In fairness it is not realistic to capture every nuance in a post on a message board without writing essays on the subject. What I took from View's post (not that I agree with it) is that we should adopt more of a eurozone perspective than a merely national one, not that the differences in taxation and other local issues were of no consequence. To certain extent it should be taken as read that the person raising the point is aware that it is not the sole consideration.

SkepticOne

View wrote: »

Consequently, I suspect we need to do a mental "flip" to place the idea of a Eurozone economy at the centre of our thinking and all issues related to the budget, should be viewed with the question "How does this improve our relative position within the Eurozone?"

To see what, I mean, consider the inflation from Eurostat which applied to the period 1997-2008. During this time, according to Eurostat, inflation in Ireland ran at double the Eurostat average. As such, we were well on our way to a finacial crisis even if if there was no global crisis to worry about.

Yes, to a large extent we should have seen that our excess of inflation above the euro average would lead to consequences. However, how realistic is it to expect our politicians to think this way? What makes economic sense does not always make political sense. To combat inflation would have meant unpopular fiscal measures and threats of revolt from backbenchers. The opposition parties during that time were not particularly vocal about needing to raise taxes or cut spending during a period when the government was in surplus. That is the way governments think.

I have never voted for Fianna Fail and I'm not planning on changing my voting the next time around and I hope they are kicked out, but we can't expect a fundamental change in thinking in this respect with a new government either unfortunately.

seclachi

How does he plan to implement such a scheme ? Its ludicrous.

If Cowen turned around tomorrow and said we were doing it, then there would be a massive run on the banks for money before it came in, causing them to implode. If he gave zero notice people would riot. The new currency would be created with one purpose, to be devalued, anybody with half a brain could see that. So on day one he might say €1 = new£1, but by day two it would be €1=£2, so people will hang on to there euro notes. If he fixed the exchange rate for a few years (which would be the only possibility) then we may well be out of recession then and it would have all been pointless.
How would we stop people from just using the euro anyway ? As far as I can see when we joined the euro we made a one way choice, theres no getting out now, not without insane consequences.