Would we recover quicker if we had kept the £IRE?

stainluss

Would we be able to recover more quickly from the recession if we had never changed to euro?
What if we still had the Irish £ and it had become weaker, our exports would be cheaper to buy abroad and there would be more cash inflow?(as in the case of the UK and Sterling)

Just a theory..

jhegarty

It would be useful if we could devalue the currency.

On the other hand , we would find it very hard to borrow anything.

meathstevie

Yes sure, and do you trust the politicians we have to come up with any half decent monetary policies ?

RealityCheck

stainluss wrote: »

Would we be able to recover more quickly from the recession if we had never changed to euro?
What if we still had the Irish £ and it had become weaker, our exports would be cheaper to buy abroad and there would be more cash inflow?(as in the case of the UK and Sterling)

Just a theory..

Chances are we may not have dug quite as big a hole as we did, but with Fianna Fail in charge over that period who knows they might have stuffed up regardless. It is'nt that surprising that we had a property bubble after the real boom of the 1990s. It may have happened whether in the euro or not. We would have had the mechanisms to control our economy better, but im not sure any of the political parties would be interested in that. People were way too easily sucked into the bubble. There is no doubt that the low eurozone interest rates in the period 03-07 played there part in our rise and fall, buts it debatable how big the effect was.

I dont think your question is easy to answer as a lot may have or have not happened if we stayed punt. On the other hand there is no doubt that it would make any fiscal adjustment easier to make, if a similar situation had occured. However, it would not have been one way traffic, as devaluing has the effect of making imports more expensive meaning any effect would be dependant on our economic structure. In our current structure the effect of devaluation would be limited and possibly counter productive as the export area of our economy is rather weak now in comparison to the heady days of the 90s.

nesf

stainluss wrote: »

Would we be able to recover more quickly from the recession if we had never changed to euro?
What if we still had the Irish £ and it had become weaker, our exports would be cheaper to buy abroad and there would be more cash inflow?(as in the case of the UK and Sterling)

Just a theory..

In short:

If you can devalue and then hold the currency at that value it can be beneficial similar to the UK devaluation of the Pound in the early 90s. If you can't hold the currency at that value you'll end up causing a very severe recession a la what happened to Mexico, Thailand, Argentina in a number of recessions.

Devaluation only works if you can convince the markets that there won't be anymore devaluation after it's done. This is a lot harder to do than people seem to realise and has caused many devaluations to merely start a sustained currency slide that cripples business with foreign denominated debt (like many of ours have) which further deepens the depression beyond what the economic fundamentals would suggest as reasonable. Devaluation can start a positive feedback loop that drags the economy into a very severe recession (one that would make our current recession look like a mild one in comparison).

SkepticOne

The problem is no so much knowing what might happen if we were to leave the Euro it is knowing what is going to happen if we stay.

I think a lot of people think that once we sort out the public sector finances that is pretty much it; however, that is merely the start of it.

Staying in the Euro doesn't really get us out of any difficulty. Whereas we are protected from currency risk (though not totally) we are exposed to credit risk e.g. the risk that interest rates will be raised while we are trying to get out of our own recession.

The euro also protects us from a currency slide (as nesf points out) but exposes us more to a deflationary spiral and this will also cause problems for businesses dependant on domestic demand trying to pay their debts.

For each disadvantage of one course of action there seems to be a corresponding disadvantage to the other.

The fundamental difference between the two, however, is that staying in the Euro involves much more of the control of the economy being handed to vote seeking politicians.

This fiscal control might involve the sort of thing we're seeing with the budget with politicians trying to convince unions to accept pay cuts but at the height of the boom rather than now when the country is on it knees, and look at the difficulty of that right now!

Or it might involve raising taxes at the height of the boom while already running a budget surplus. Try getting that past the public.

This is why the task of monetary control is normally handled by an independent central bank with a remit to control inflation. The central bank is not looking to be re-elected and so can make difficult decisions.

It is not going to be easy either way, but I think it is important to see both sides of the issue.

SLUSK

Can you tell me any country where devaluation was successful in the long run?

RealityCheck

SLUSK wrote: »

Can you tell me any country where devaluation was successful in the long run?

Ireland in the early 90s as it happens.

SkepticOne

SLUSK wrote: »

Can you tell me any country where devaluation was successful in the long run?

I think what is being argued here is not devaluation per se, but the pros and cons of a floating currency as opposed to a currency union of economies.

SLUSK

Oh you mean the Celtic Tiger... wasn't that because of lowered taxes + a ****load of money from the EU...?

By normal logic I can't see how a reduction in people's purchasing power will be good for the economy...

SkepticOne

SLUSK wrote: »

Oh you mean the Celtic Tiger... wasn't that because of lowered taxes + a ****load of money from the EU...?

By normal logic I can't see how a reduction in people's purchasing power will be good for the economy...

We're going to have to see a reduction in people's purchasing power anyway, just as someone who goes on a splurge with the credit card subsequently has to curtain his spending. Not pleasant but there you are.

Personally I think we would have been better off without the latter half of what is called the Celtic Tiger, based as it was on a building boom and cheap credit.

RealityCheck

SLUSK wrote: »

Oh you mean the Celtic Tiger... wasn't that because of lowered taxes + a ****load of money from the EU...?

By normal logic I can't see how a reduction in people's purchasing power will be good for the economy...

Well it worked. Our export led boom was because of many reasons. No doubt the devaluation helped when things were looking shaky.

nesf

SLUSK wrote: »

Can you tell me any country where devaluation was successful in the long run?

The purpose of a devaluation is to spur growth. Two devaluations in the 90s (UK and Australia) both achieved this goal. Multiple devaluations in the 90s didn't. It comes down to market confidence and whether your currency will be attacked speculatively or not (or in other words whether the world believes that you're not going to have to devalue your currency again in the short term).

It can and does work but it is a risky move for anything other than a large established economy. Small economies and economies with histories of financial or fiscal distress are more likely to find a devaluation triggers a nasty recession. That said, by the time you're at the point where you'd consider a devaluation you're generally in quite a bad position to start with.

Dannyboy83

nesf wrote: »

The purpose of a devaluation is to spur growth. Two devaluations in the 90s (UK and Australia) both achieved this goal. Multiple devaluations in the 90s didn't. It comes down to market confidence and whether your currency will be attacked speculatively or not (or in other words whether the world believes that you're not going to have to devalue your currency again in the short term).

Q for you NESF:
Were the UK banks able to avail of ECB loans in the same manner as the Irish banks?

There was a point David McWilliams made in his book, that the level of borrowing witnessed by the banks would not have been possible under the Punt, as entry into the EMU opened up a colossal bank/market from which to source cheap money.
Apparently by 2000/2001, we had reached a certain threshold beyond which it was difficult to expand.

Perhaps I've misunderstood something here to be fair, as I'm not well clued into how this credit system works, but I was surprised as RBS were one of the worst offenders during the pyramid years, apparently exceeding the entire GDP of Scotland by a multiple.

RealityCheck

Dannyboy83 wrote: »

Q for you NESF:
Were the UK banks able to avail of ECB loans in the same manner as the Irish banks?

The ECB is the central bank of the Eurozone. They have there own central bank to control there economy so no. The Bank of England went down the quantitive easing route by printing more money.

97i9y3941

i think it would be hard if we did go back to the punts,england being a bigger country could afford to devalue,since we dont make stuff in ireland anymore i dont think we would be able to survive on the punt nowadays,the low tax was another reason brought the big companys here,but the cost of living was cheap aswell so moving to ireland back then had it as "made in europe" status

K-9

RealityCheck wrote: »

Ireland in the early 90s as it happens.

We then had a period in the mid to late 90's where the Punt was worth more than sterling.

Wages and other costs where lower then though.

Dannyboy83

RealityCheck wrote: »

The ECB is the central bank of the Eurozone. They have there own central bank to control there economy so no. The Bank of England went down the quantitive easing route by printing more money.

Oh yea, don't worry I understand all that.
(sorry, some poor wording by myself in the original Q).

What I meant was where did RBS & friends, source all their cheap credit?
I'm referring to the start of the pyramid here, not the bailouts.

97i9y3941

as i said aswell,the low tax rate was attractive to companys back then too..

RealityCheck

Dannyboy83 wrote: »

Oh yea, don't worry I understand all that.
(sorry, some poor wording by myself in the original Q).

What I meant was where did RBS & friends, source all their cheap credit?
I'm referring to the start of the pyramid here, not the bailouts.

The international bond markets. The interventions by the ECB and BOE were emergency measures only. The idea behind the bailouts etc is to get the banks back to a healthy position so that they can borrow from international investors. The bond markets comprise the likes of pension funds etc. We may in effect be building a new pyramid. Hopefully it might be a better built one this time :P.

Dannyboy83

RealityCheck wrote: »

The international bond markets.

So would you agree that DMCWs is wrong in his assertions that the pyramid could not have been inflated to the stage it was without entry into the EMU?

I suppose its a half truth.
i.e. its true that not the same extent of credit would have been available, nor at such a cheap rate, but equally there were not necessarily a cut off point.

I wonder what the difference in interest rates would have been between the UK BOE & Irish rates on the bonds.
I'm assuming that the UK would pay a higher rate on their bonds, given that they did not have ECB protection.

Also, what was the position with Ulster Bank, which is a subsidiary of RBS, with regard to the bonds, considering they were operating within the Irish market? Would they have a lower risk premium or is this determined on the parent company?
Assuming Ulster Bank collapsed, would RBS be obliged to step in, or are they able to allow it to collapse like a ltd. company?

RealityCheck

Dannyboy83 wrote: »

So would you agree that DMCWs is wrong in his assertions that the pyramid could not have been inflated to the stage it was without entry into the EMU?

Probably yes. The whole cheap credit thing has as much to do with goings on worldwide than it has with the EMU. The only reason the EMU had such an effect here was due to the fact that interest rates at one point in the eurozone were totally out of kilter with what we required here.

Dannyboy83 wrote: »

I wonder what the difference in interest rates would have been between the UK & Irish banks on the bonds.
I'm assuming that the UK would pay a higher rate on their bonds, given that they did not have ECB protection.

Also, what was the position with Ulster Bank, which is a subsidiary of RBS, with regard to the bonds, considering they were operating within the Irish market? Would they have a lower risk premium or is this determined on the parent company?
Assuming Ulster Bank collapsed, would RBS be obliged to step in, or are they able to allow it to collapse like a ltd. company?

I would'nt be the biggest expert on these things. Think nesf might be your man . My take on it though is that there would'nt have been much difference as the world was booming. Poeple wanted to invest money everywhere and anywhere eventually leading to too much money supply and people making dodgy investments, like investing in Anglo.

nesf

Massive capital inflows would probably have happened regardless of the Eurozone. Ireland's profile as a new economic miracle would have ensured plenty of money flowing in, plus remember in relation to the international markets we're tiny, so massive inflows for us are almost insignificant compared to how much money there was available for overseas investment worldwide during the boom years.

Having their own currencies didn't shelter any of the Asian Tiger countries from large capital inflows inflating bubbles there so it'd be naive to expect having the Punt would have protected us from them innately. Also bond rates aren't the issue, the money wasn't being borrowed by the Government but by banks on the international money markets.

Dannyboy83

Could you answer this please NESF?

dannyboy83 wrote:

Also, what was the position with Ulster Bank, which is a subsidiary of RBS, with regard to the bonds, considering they were operating within the Irish market? Would they have a lower risk premium or is this determined on the parent company?
Assuming Ulster Bank collapsed, would RBS be obliged to step in, or are they able to allow it to collapse like a ltd. company?

nesf wrote: »

Having their own currencies didn't shelter any of the Asian Tiger countries from large capital inflows inflating bubbles there so it'd be naive to expect having the Punt would have protected us from them innately. Also bond rates aren't the issue, the money wasn't being borrowed by the Government but by banks on the international money markets.

Unless I'm mistaken, there were regulations in place (Fractional reserve and all that) until mid 2005 when they were altered, which is when things really got crazy.

I take your point about the minuscule amount of capital inflow necessary to have a dramatic impact on a tiny economy like ours, but considering the tiny starting position anyway, were the amounts borrowed excessive?
Who was responsible for regulation in 2001, before the pyramid economy took off?

Would it not make more sense to have the ECB as the gatekeeper to international monkey markets for EU member state banks, so tight controls are kept on who borrows what?
Are there currently restrictions on independent banks borrowing money from the international money markets? (I mean legal restrictions, obviously there is very little confidence etc.)


Obviously there was the financial regulator which was as good as nothing, but what about ECB rules?
If not, do you expect there will be ECB rules in future?
Or does this overstep the sovereignty lines?
I thought it would seem to be far more cost effective for the ECB to have a series of regulators/auditors in every EU country compared to the amount of money they've lost due to lax regulation.

Dannyboy83

eh, lot of questions there, sorry about that.

Alternatively I'd be happy to be pointed toward a good resource where I could educate myself a bit more on the above, nothing too legalistic tho please.

nesf

Ulster Bank would be viewed as a wing of RBS for the most part and inherit its problems and its good times. RBS suffered badly during the credit crunch and this caused it to tighten up operations here which caused job losses.

Banking regulation is already partly global: http://en.wikipedia.org/wiki/Basel_II

The "laws" of banking (i.e. how much capital a bank must hold in reserve) is agreed internationally for all banks pretty much.

Daragh101

no because we couldnt do that without leaving the eu!

Flamed Diving

Daragh101 wrote: »

no because we couldnt do that without leaving the eu!

Why?

Daragh101

Flamed Diving wrote: »

Why?

well we could, but we would have to pay back the millions in grants we got from them over the years!

ei.sdraob

Dannyboy83 wrote: »

So would you agree that DMCWs is wrong in his assertions that the pyramid could not have been inflated to the stage it was without entry into the EMU?

hes wrong all he has to do is remember his trip to Iceland

not being in the EU/euro didnt stop them creating a big mess

ei.sdraob

Daragh101 wrote: »

well we could, but we would have to pay back the millions in grants we got from them over the years!

we dont have to leave the EU to leave the euro

but as was mentioned over and over in the leave the euro threads


1. there will be a run on the new currency as it would take months to changeover, causing businesses hardship

2. this hasn't been done before

3. most of the debt will remain in euro



and to answer the OP

no we would not have recovered quickly, look at UK they kept their currency and while the rest of larger Eurozone members are out of recession, they are not and are still printing money to no avail