Leaving the €uro: Pros & Cons?

The Minstrel

Alot of informed comment suggesting our only solution is to exit the Euro and devalue our currency in much the same way as Iceland has done. Indeed, Portugal are making noises about opting out. Would this lead to spiralling interest rates?

What are the pros and cons of leaving the euro-zone?

ei.sdraob

1. dump our debt into EU
2. cut the deficit
3. leave euro
4. ???
5. profit


:eek: Fianna Fail's "cunning" gameplan :P

Sleepy

Con:

• Flight of MNC's who've based their European headquarters here.
• Capital flight as those with money move it into foreeign banks, gold or other non-'punt-nua' denominated accounts
• Erosion of savings held in 'punt-nua' as it depreciates against the Euro
• Cost of borrowings increases as 'punt-nua' becomes less valuable than the currency our external debt is denominated in
• Imports become far more expensive.

Pro:

• Improved competitiveness as punt nua depreciates against Euro, Dollar and Sterling.
• Boost to exports based on the above.
• Mortgages and other debt is reduced as it is now denominated in punt nua which will depreciate. Only matters to average Joe if his income is in a different currency. (could lead to a flight of talent as people seek to be paid in Sterling, Euro or dollar?)
• Would cement current Fianna Fail's position as 'worst government ever'

raymann

a year ago any talk of leaving the euro would have been dismissed as ant eu nonsense. now here we are, its being fully talked about as a viable alternative.

the thing that really scares me is it might our best option. how did we **** things up so badly.

SkepticOne

There are a lot of good aspects to being in the Euro. The main one is that if you have savings, then they are in a currency where monetary policy is dominated by Germany. Thus inflation is going to be kept low and the currency is going to hold its value. Currency risk is eliminated when trading with companies in other currencies. Also it is nice to be able to travel in the Eurozone countries without changing money.

I think a mistake a lot of people made, however, was in thinking that the Euro in some way protected profligate Ireland against the financial markets. When the crisis broke, I remember a lot of people saying that at least we are in the Euro and therefore we're safe. We now know that is not the case. We are just as vulnerable except that, instead of taking it out on us in in foreign currency, the attacks are limited to the bond markets.

If traders were merely selling our currency then Ireland would suffer a devaluation. This, of course, is not nice if you are a saver however if you are an exporting business you are given an short term competitiveness boost. Thus, there's a bit of stability built in.

However the bond markets are a different story. If we are punished in the bond markets then we are forced to pay higher interest rates and this in itself undermines competitiveness which in turn drives the yields higher. This is inherently unstable.

What we gave up in joining the Euro was the ability to allow the markets to set the price of the currency and we entered essentially sort of price fixing cartel where, regardless of the states of the respective economies, the same price was set for the currency. Whenever you try to do this, you get imbalances and that is what we're seeing in the Eurozone. The various committees to oversee budgets won't work any better, imo, than the various committees the Soviet Union set up to set prices.

3DataModem

Sleepy wrote: »

Mortgages and other debt is reduced as it is now denominated in punt nua which will depreciate. Only matters to average Joe if his income is in a different currency. (could lead to a flight of talent as people seek to be paid in Sterling, Euro or dollar?)

Wishing...
And Hoping...
And Waiting...







(By the way it will not be "punt nua" it will be "Bart Bucks")

Inquitus

Sleepy wrote: »

Mortgages and other debt is reduced as it is now denominated in punt nua which will depreciate.

That debt is held by major financial institutions around Europe and indeed the rest of the world, I don't see how it could be switched from Euro to Punt. More likely anyone with a Mortgage will have a euro debt to service on devalued punt wages.

SkepticOne

Inquitus wrote: »

That debt is held by major financial institutions around Europe and indeed the rest of the world, I don't see how it could be switched from Euro to Punt. More likely anyone with a Mortgage will have a euro debt to service on devalued punt wages.

I don't think so, to be honest. If Ireland leaves the Euro it would probably be in the context of a default. Leaving the Euro, and re-denominating debts owed by Irish institutions to foreign ones into the new currency would simply be part of the form that default would take.

Sand

As Sleepy has pointed out, massive capital flight/bank runs will occur as soon as its even whispered Ireland is about to leave the Euro - and given problems as simple as vending machines, stocking ATMs and so on that isnt something that can be done overnight. The only thing that has prevented capital flight so far is that belief that Ireland is backed by the ECB.

And devaluation is possibly the most unfair solution to our problems: a 30% devaluation is an immediate seizure of all wealth held in the devalued currency. And it will fall hardest on the poorest sectors of society who are so much less likely to hold assets abroad in foreign currencies. And given the insider class within Ireland, you can be sure it would be the connected people who would best prepare for the devaluation by moving their assets abroad.

I dont think we will get a boost to exports either - 90% of Irelands exports originate from the MNC here, who import practically all their inputs. Whats gained on selling the exports, will be lost on buying the imports, assuming the MNCs even decide to do business in a currency as weak and untrusted as a Punt Nua. Id expect practically all MNC workers would prefer to be paid in Euros.

Also economic growth occurs best in conditions where investors can make reasonable assumptions about the risks they are facing. A stable euro is a benefit, a Punt Nua which would go up and down like a yo-yo any time there was a problem would be a liability.

Panrich

What effect would this have on tracker mortgages?

Sand

Honestly thats impossible to say. The banks hate tracker mortgages. In the chaos of euro exit/capital flight/bank run/devaluation/default its unlikely theyll be much more respectful of their contracts with individual borrowers than they would have been with their institutional creditors.

I wouldnt rely on your contract with the bank to be legally enforceable in the context of a euro exit.

Dorcha

A few questions here for the knowledgeable:

If currency trading is buying and selling currencies, then how does it affect the countries involved?

Why is trading in currencies allowed at all?

Why can not the rate of exchange between currencies be set once and for all and left that way?

Sleepy

That's exactly what the Euro is (or rather, it's pre-cursor the EMU, was) Dorcha - a set exchange rate between currencies.

Sungodbr

Why can not the rate of exchange between currencies be set once and for all and left that way? [/QUOTE]

surely there always has to be allowances made for countries to get stronger and weaker and there respective currencies to get stronger and weaker as a result

johnnyskeleton

Two problems make it, if not impossible, then at least very difficult to leave the Euro:

1) our external debts are mostly denominated in Euro. If we leave and get a new currency, the real cost of servicing our debt will be increased due to the relative strength of the euro;

2) ireland is a constitutional democracy where property rights are respected. Thus, if a bank owes me €50, I can insist on being paid that in euro not in the new currency. When the euro changeover took place, people were given the option to take out their savings in punts and keep those notes, and as the punt ceased to exist it would be pointless to do so. The Euro, by contrast, will remain, and if a contract is in euro I don't see how this can be altered into a new currency by way of statute.

The only constitutionally acceptable changeover to my mind would allow people to choose whether to keep their savings and existing contracts in euro or redenominate to the new currency. I can't imagine that there would be much of a take up in this. Things like PS wages and Social welfare can be redenominated in the new currency going forward, but debts already incurred probably can't.

That said, they may try to force a change through.

ArmaniJeanss

Dorcha wrote: »

Why can not the rate of exchange between currencies be set once and for all and left that way?

Because once a country decides to print more of its currency then by definition it immediately changes its rate against other countries.
So if say the Euro to Yen rate was set as 1 Euro to 5 Yen and (to use your words) 'left that way' what would happen if the Japanese decided to double the amount of yen they print in a year? They've effectively halved the value of the yen but yet can still buy a Euro for 5 yen.

If rates are fixed then countries can't decide how much they print or set their own interest rates - this situation would be effectively One World Currency.
And you see how difficult a single currency (euro) has been to organise amongst 15 or so of the most affluent countries in the world.

Hope that makes sense, maybe someone can explain it much more succintly that me.

Tora Bora

The Minstrel wrote: »

Alot of informed comment suggesting our only solution is to exit the Euro and devalue our currency in much the same way as Iceland has done. Indeed, Portugal are making noises about opting out. Would this lead to spiralling interest rates?

What are the pros and cons of leaving the euro-zone?

The clever guys who have already converted their euros into some other currency, or gold, would become "punt nua millionaires" overnight:cool:

SkepticOne

Sand wrote: »

As Sleepy has pointed out, massive capital flight/bank runs will occur as soon as its even whispered Ireland is about to leave the Euro - and given problems as simple as vending machines, stocking ATMs and so on that isnt something that can be done overnight. The only thing that has prevented capital flight so far is that belief that Ireland is backed by the ECB.

But we've already seen massive capital flight and it is ongoing and not related to Ireland leaving the Euro but to fear that the Irish state will be unable to service its debts within the Euro.

And devaluation is possibly the most unfair solution to our problems: a 30% devaluation is an immediate seizure of all wealth held in the devalued currency. And it will fall hardest on the poorest sectors of society who are so much less likely to hold assets abroad in foreign currencies. And given the insider class within Ireland, you can be sure it would be the connected people who would best prepare for the devaluation by moving their assets abroad.

But the poorest in society who may not have much in the way of savings are more likely to benefit from jobs growth due to increased competitiveness. The biggest losers, imo, would be the insiders who get paid by the state in Euros. A senior civil servant, for example, would have their salary devalued with the currency. An indigenous exporting country, on the other hand, will receive a boost.

I dont think we will get a boost to exports either - 90% of Irelands exports originate from the MNC here, who import practically all their inputs. Whats gained on selling the exports, will be lost on buying the imports, assuming the MNCs even decide to do business in a currency as weak and untrusted as a Punt Nua. Id expect practically all MNC workers would prefer to be paid in Euros.

I think you are correct here with regard to MNC exports but exports by indigenous companies are the ones we really need to grow as profits made by them are much more likely to stay in the country and these indigenous companies are concerned with locally generated costs. And not just exports but import substitutions would also get a boost.

While workers in MNCs may initially want their pay in Euros, after a while they are going to resent having to pay foreign currency charges in order to shop locally, pay rent etc.

Also economic growth occurs best in conditions where investors can make reasonable assumptions about the risks they are facing. A stable euro is a benefit, a Punt Nua which would go up and down like a yo-yo any time there was a problem would be a liability.

The problem is that a stable Euro, like any attempt at fixing a price, creates instability elsewhere. The Argentineans thought they were creating stability by linking their currency to the dollar but all they did was create imbalances that led to their currency crisis.

Sand

But we've already seen massive capital flight and it is ongoing and not related to Ireland leaving the Euro but to fear that the Irish state will be unable to service its debts within the Euro.

We've seen some capital flight. Massive capital flight occurs when everything that isnt nailed down leaves the country to try retain value.

Our prospects of serving our debts outside the Euro arent going to improve. And we will not have the support of the ECB/Germany which has some interest in preventing contagion within the Euro.

But the poorest in society who may not have much in the way of savings are more likely to benefit from jobs growth due to increased competitiveness. The biggest losers, imo, would be the insiders who get paid by the state in Euros. A senior civil servant, for example, would have their salary devalued with the currency. An indigenous exporting country, on the other hand, will receive a boost.

We dont have much in the way of an indigenous exporting industry to hire these people. As I noted, 90% of "Irish" exports are from the MNC sector. The MNCs have an immense distorting effect on statistics relating to the wider Irish economy, despite doing very little bussiness within the Irish economy. So we can overestimate the benefit of a devaluation versus the associated costs.

I think you are correct here with regard to MNC exports but exports by indigenous companies are the ones we really need to grow as profits made by them are much more likely to stay in the country and these indigenous companies are concerned with locally generated costs. And not just exports but import substitutions would also get a boost.

I agree we need to encourage indigenous exporters, but a devaluation isnt required for that, in fact it could be harmful in that it would increase uncertainty over investment decsions and contracts.

While workers in MNCs may initially want their pay in Euros, after a while they are going to resent having to pay foreign currency charges in order to shop locally, pay rent etc.

I think most people would prefer to get paid in Euros. Theres not much that Irish companies make that I want (which is at the heart of the export weakness) so getting paid in Euros will save the hassle of foreign currency charges from Punt Nua to Euros.

People want to save and invest in a trustworthy currency. A punt nua, invented purely for the purpose of devaluation, at the mercy of incompetents in the DoF and the Central Bank, wont inspire trust.

Count Dooku

SkepticOne wrote: »

While workers in MNCs may initially want their pay in Euros, after a while they are going to resent having to pay foreign currency charges in order to shop locally, pay rent etc.

I think that MNC's will follow their standard practice link salary to hard currency, but pay in punts using exchange rate on pay day.
It will also allow MNC's attract best of best and increase their profits

Scofflaw

Count Dooku wrote: »

I think that MNC's will follow their standard practice link salary to hard currency, but pay in punts using exchange rate on pay day.
It will also allow MNC's attract best of best and increase their profits

It would, in short, complete the "race to the bottom" that many European commentators seem to believe we've been engaged in for the last several years.

Not only would we be a low tax haven, we'd also be payable in 'funny money' - we'd probably wind up with a requirement that tourists coming to the country convert so many euro a day (or whatever hard currency they had) to help us fund our still-euro-denominated foreign debt. Even if the state defaulted - and the state is probably the least likely to need or want to - the banks are still holding euro-denominated debt, and so are many of our companies and citizens.

I doubt that it would allow the MNCs to attract top foreign talent, because any talent with half a brain would insist on being paid in hard currency rather than our local bits of yo-yoing paper - after all, they'd hardly be looking to retire here.

cordially,
Scofflaw

P. Breathnach

Tora Bora wrote: »

The clever guys who have already converted their euros into some other currency, or gold, would become "punt nua millionaires" overnight:cool:

I'd sooner have €50 than be one of those punt nua millionaires.

Count Dooku

Sand wrote: »

And devaluation is possibly the most unfair solution to our problems: a 30% devaluation is an immediate seizure of all wealth held in the devalued currency. And it will fall hardest on the poorest sectors of society who are so much less likely to hold assets abroad in foreign currencies.

Another option is to reduce welfare PS payroll bill by 30-40% and abolish minimum wage.
In short term it will be political suicide for any party, but in long term it could save country from expelling from Euro and give some chances for recovery.
Poorest will pay in any scenario, questions are only when and how much?

SkepticOne

Scofflaw wrote: »

It would, in short, complete the "race to the bottom" that many European commentators seem to believe we've been engaged in for the last several years.

I know union officials in Ireland are fond of this phrase but I have not been aware of it being used by our European collegues. What do you mean by "race to the bottom" in this context and who are these European commentators?

Scofflaw

Something to bear in mind is that there is no mechanism whatsoever for any country to be expelled from the euro. Instead, the Treaties contain a commitment that all countries will join the euro - those countries that haven't joined technically have derogations, but a derogation must be sought, it cannot be imposed, and may not be allowed.

cordially,
Scofflaw

SkepticOne

Scofflaw wrote: »

Something to bear in mind is that there is no mechanism whatsoever for any country to be expelled from the euro. Instead, the Treaties contain a commitment that all countries will join the euro - those countries that haven't joined technically have derogations, but a derogation must be sought, it cannot be imposed, and may not be allowed.

None of that is set in stone. A lot is happening now that would have been forbidden a few years ago such as the bailout of Greece and the one that is believed to be under discussion at the moment with Ireland.

Scofflaw

SkepticOne wrote: »

I know union officials in Ireland are fond of this phrase but I have not been aware of it being used by our European collegues. What do you mean by "race to the bottom" in this context and who are these European commentators?

I was thinking of the comments written on foreign media websites - such as Le Monde - and the "race to the bottom" they're referring to is in the context of a social economy. The US would be seen by a lot of continental Europeans as being at the bottom, in the sense that they operate low tax and minimal government social support, as compared to, say the Scandinavian high-tax and high social support model. The view is that this makes individual workers more vulnerable to exploitation and shows a preference for the wishes of business over the needs of ordinary people.

Closer to Boston than Berlin, essentially - movement towards the US model is regarded as downwards from the point of view of many continental countries. It doesn't help that we spent the last decade flaunting our success as being a result of exactly those kind of policies.

cordially,
Scofflaw

Scofflaw

SkepticOne wrote: »

None of that is set in stone. A lot is happening now that would have been forbidden a few years ago such as the bailout of Greece and the one that is believed to be under discussion at the moment with Ireland.

The rules can be bent, but can't be broken without legal consequences - and even the bending has been the subject of legal challenge.

cordially,
Scofflaw

SkepticOne

Scofflaw wrote: »

The rules can be bent, but can't be broken without legal consequences - and even the bending has been the subject of legal challenge.

It would happen through a process of renegotiation like the changes we have seen so far which would have seemed unthinkable a few years ago. If the Euro doesn't suit Ireland, then it also doesn't suit other Eurozone countries to have Ireland in the Euro.

SkepticOne

Scofflaw wrote: »

I was thinking of the comments written on foreign media websites - such as Le Monde - and the "race to the bottom" they're referring to is in the context of a social economy. The US would be seen by a lot of continental Europeans as being at the bottom, in the sense that they operate low tax and minimal government social support, as compared to, say the Scandinavian high-tax and high social support model. The view is that this makes individual workers more vulnerable to exploitation and shows a preference for the wishes of business over the needs of ordinary people.

Closer to Boston than Berlin, essentially - movement towards the US model is regarded as downwards from the point of view of many continental countries. It doesn't help that we spent the last decade flaunting our success as being a result of exactly those kind of policies.

cordially,
Scofflaw

Can you link me to an article where that phrase (or the local equivalent) has been used? Doesn't have to be in English.

I don't think we're going to get out of this without seriously undercutting our competitors in other countries and thereby bringing money into Ireland. I can see why other European countries might not like things like our low corporation tax which they might regard as unfair but that does not mean we should go along with their desire that we remove it.

I think I can see where you are coming from in your opposition to leaving the Euro, but I think you're looking at this from the point of view of Germany and France, large core European economies. They don't want trading partners in the free trade area undercutting them.

Would this be a fair assessment of your position?

Scofflaw

SkepticOne wrote: »

Can you link me to an article where that phrase (or the local equivalent) has been used? Doesn't have to be in English.

I can't without a fair bit of searching around give you the exact phrase (aside from anything else, I read it in Google-provided translation). This Le Monde page of comments gives a reasonable flavour:

Ah, the rigor in times of crisis, the monetary orthodoxy, I was told that Ireland was a model, they have lowered their wages, pensions, state spending! And what happens? More deficit, more unemployment, and the loop is ready to begin. Read the article in the diplomatic world in October, it is very enlightening.In fact, this is not what kind of remedy that sets up the UK? Long live the Irish, the neoliberal model par excellence!

SkepticOne wrote: »

I don't think we're going to get out of this without seriously undercutting our competitors in other countries and thereby bringing money into Ireland. I can see why other European countries might not like things like our low corporation tax which they might regard as unfair but that does not mean we should go along with their desire that we remove it.

While some EU countries would like to see us raise our corporation tax rate, it's hard to see how they can require it - and even harder to see that they could require it and have the bailout work, in terms of Ireland's ability to repay, in terms of stabilising the euro, and in terms of having the European fund be preferred over the IMF.

SkepticOne wrote: »

I think I can see where you are coming from in your opposition to leaving the Euro, but I think you're looking at this from the point of view of Germany and France, large core European economies. They don't want trading partners in the free trade area undercutting them.

Would this be a fair assessment of your position?

Apologies - would what assessment? That Ireland shouldn't seek to undercut other EU states in competition for FDI? No, I have no grouse with that, apart from the fact that focusing too heavily on FDI multinationals has meant that the domestic business sector has become largely parasitic. We're not in a position to make do on our own markets, and to be prosperous, we're necessarily going to have to be an export hub of some kind, and that does mean being more attractive than other countries.

cordially,
Scofflaw

southsiderosie

SkepticOne wrote: »

But the poorest in society who may not have much in the way of savings are more likely to benefit from jobs growth due to increased competitiveness. The biggest losers, imo, would be the insiders who get paid by the state in Euros. A senior civil servant, for example, would have their salary devalued with the currency. An indigenous exporting country, on the other hand, will receive a boost.

Ireland imports the vast majority of its consumer goods. Since the poor spend a much larger percentage of their income on household consumption, they would be extremely hard-hit by a currency devaluation - household costs would jump astronomically.

The main export benefits for the Irish economy other than the corporate tax comes from the fact that there are a lot of people working for export-oriented MNCs who pay income tax and VAT. These people are not going to want to be paid in local currency, especially since a large number of them are not locals, and the new punt would most likely not be fully convertible. Plus, it is a bonus when you are paid in a currency that is worth more than the one you pay your bills with.

SkepticOne wrote: »

The problem is that a stable Euro, like any attempt at fixing a price, creates instability elsewhere. The Argentineans thought they were creating stability by linking their currency to the dollar but all they did was create imbalances that led to their currency crisis.

It's funny that you bring up Argentina, because I would point to them as a prime example of why going off the euro would be an absolute disaster for Ireland. The Argentines did create stability by pegging their currency, but they did not curb their fiscal profligacy, which is what ended up driving the crisis (aound familiar?). When they finally dropped the peg (which is what Ireland would be doing in effect), unemployment shot up to 25%, inflation was over 80%, and the exchange rate immediately went from 1:1 to 4:1. Yes Kirtchener told the bondholders to step off, but he also had a lot of help from Hugo Chavez, who not only bought a lot of bad Argentine debt, but also sent them subsidized oil. They were also helped by skyrocketing soybean prices.

Ireland is not a major commodities exporter, nor does it have a political sugar daddy waiting in the wings. Going off of the euro would be fiscal suicide.

Sand

@Count Dooku

Another option is to reduce welfare PS payroll bill by 30-40% and abolish minimum wage.
In short term it will be political suicide for any party, but in long term it could save country from expelling from Euro and give some chances for recovery.
Poorest will pay in any scenario, questions are only when and how much?

Well, certainly, our expenditure has to come in line with our revenue, and if it has to be done, its best that its done quickly. But Id prefer cuts are targeted at waste and unrequired services, rather than vital services.

The 30-minute-cheque-break has highlighted the potential there is in in the Civil Service and Public Sector for cutting out silly perks, which of course have to be administered.

Also, I heard a commentator on Sunday morning Newstalk highlighting there are 34 drug taskforces/quangos vs. 20 beds available in Dublin for 30,000 drug addicts which demonstrates the imbalance between highly salaried talking shops and actual front line service.

So whilst the 30-40% might be the headline, the cuts need to fall in the right places.

SkepticOne

southsiderosie wrote: »

Ireland imports the vast majority of its consumer goods. Since the poor spend a much larger percentage of their income on household consumption, they would be extremely hard-hit by a currency devaluation - household costs would jump astronomically.

The cost of raw imports would increase, but bear in mind that a lot of what we pay is mark up by retailers who have to pay rents, professional fees, wages and other costs generated in Ireland. And even if we stay in the Euro, measures are going to have to be brought in that hurt the poor. Social welfare is going to come down as well as the minimum wage and taxes will start to be imposed on those on that reduced minimum wage. Property tax will be brought in which by its nature is regressive and will hit the poorest.

The main export benefits for the Irish economy other than the corporate tax comes from the fact that there are a lot of people working for export-oriented MNCs who pay income tax and VAT. These people are not going to want to be paid in local currency, especially since a large number of them are not locals, and the new punt would most likely not be fully convertible. Plus, it is a bonus when you are paid in a currency that is worth more than the one you pay your bills with.

I think you are correct here. It is not unusual for expats to be paid in the likes of US dollars when working abroad and I don't think it is a huge problem if that is what they want. Most people, however will get paid and be happy to be paid in the local currency. US expat managers working in, say, Malaysia for US multinationals get paid in dollars whereas ordinary staff get paid in ringgits since that is what is legal tender there.

It's funny that you bring up Argentina, because I would point to them as a prime example of why going off the euro would be an absolute disaster for Ireland. The Argentines did create stability by pegging their currency, but they did not curb their fiscal profligacy, which is what ended up driving the crisis (aound familiar?). When they finally dropped the peg (which is what Ireland would be doing in effect), unemployment shot up to 25%, inflation was over 80%, and the exchange rate immediately went from 1:1 to 4:1. Yes Kirtchener told the bondholders to step off, but he also had a lot of help from Hugo Chavez, who not only bought a lot of bad Argentine debt, but also sent them subsidized oil. They were also helped by skyrocketing soybean prices.

I'm not sure the facts back you up here. Looking at the graph and allowing for a lag,



it appears that the build up happened prior to devaluation and then after devaluation started to decline.

The problem with Argentina is that their currency was pegged to the dollar which appreciated significantly in the 90's. Then when Brazil devalued by 30%, Argentina couldn't cope. Pegging their currency to the dollar helped in one way (to curb inflation) but caused problems in other respects.

Ireland is not a major commodities exporter, nor does it have a political sugar daddy waiting in the wings. Going off of the euro would be fiscal suicide.

The fact that Ireland doesn't export commodities makes locally generated costs even more important and the competitiveness boost created by devaluation greater.

southsiderosie

SkepticOne wrote: »

The cost of raw imports would increase, but bear in mind that a lot of what we pay is mark up by retailers who have to pay rents, professional fees, wages and other costs generated in Ireland. And even if we stay in the Euro, measures are going to have to be brought in that hurt the poor. Social welfare is going to come down as well as the minimum wage and taxes will start to be imposed on those on that reduced minimum wage. Property tax will be brought in which by its nature is regressive and will hit the poorest.

I think you are correct here. It is not unusual for expats to be paid in the likes of US dollars when working abroad and I don't think it is a huge problem if that is what they want. Most people, however will get paid and be happy to be paid in the local currency. US expat managers working in, say, Malaysia for US multinationals get paid in dollars whereas ordinary staff get paid in ringgits since that is what is legal tender there.I'm not sure the facts back you up here. Looking at the graph and allowing for a lag,



it appears that the build up happened prior to devaluation and then after devaluation started to decline.

The problem with Argentina is that their currency was pegged to the dollar which appreciated significantly in the 90's. Then when Brazil devalued by 30%, Argentina couldn't cope. Pegging their currency to the dollar helped in one way (to curb inflation) but caused problems in other respects. The fact that Ireland doesn't export commodities makes locally generated costs even more important and the competitiveness boost created by devaluation greater.

What is that graph of? There is no key. Hopefully that is not meant to be inflation, because the Argentine government has been fudging the numbers on that since the currency crisis.

Argentina put itself in a Fiscal Straitjacket because it has never been able to control its spending. Ever. They export commodities that are valued in dollars, and this at least gave businesses some form of stability. The problem with the Argentines and the Irish for that matter is that they want credit markets and international companies to treat them like they are responsible countries, but they want to dole out political goodies like clientelist banana republics. They can't have it both ways, and no amount of blaming neighbors or bankers will rectify that.

Whatever will happen next in Ireland will hurt the poor. But dumping the euro will dramatically increase household costs at a time when social welfare payments will have to be slashed, as Ireland will have no access to international credit markets.

Dumping the euro will also crush the middle class, and destroy what is left of the banking system. If banks keep debt and savings in euros, but people are paid in punts, most people will never be able to afford to pay of their mortgages. If banks completely switch over to punts, perhaps some debt could be inflated away, but people would theoretically lose their savings...and I say theoretically because the minute the government announces that they are switching to punts, people will race to withdraw their euro savings and move them abroad.

Again, dumping the euro would be fiscal suicide.

ei.sdraob

SkepticOne wrote: »

The Argentineans thought they were creating stability by linking their currency to the dollar but all they did was create imbalances that led to their currency crisis.

Argentinian problem was much deeper than that running back decades, lookup Peronism

SkepticOne

southsiderosie wrote: »

What is that graph of? There is no key. Hopefully that is not meant to be inflation, because the Argentine government has been fudging the numbers on that since the currency crisis.

Sorry it is unemployment. You can see that it was on the rise prior to devaluation and then started to decline.

Argentina put itself in a Fiscal Straitjacket because it has never been able to control its spending. Ever.

I'm not sure that is a valid point. Are you arguing that because they could not control their spending that they therefore should have maintained the peg with the dollar?

They export commodities that are valued in dollars, and this at least gave businesses some form of stability. The problem with the Argentines and the Irish for that matter is that they want credit markets and international companies to treat them like they are responsible countries, but they want to dole out political goodies like clientelist banana republics. They can't have it both ways, and no amount of blaming neighbors or bankers will rectify that.

The fact that they have exports in dollars should have mitigated the need to devalue somewhat but they could not, even with their commodities, survive the combined effect of the appreciated US dollar with the devaluation of Brazilian currency. As I said earlier, since we don't have valuable commodities, we only have our people, the case for devaluation is stronger, other things being equal.

Whatever will happen next in Ireland will hurt the poor. But dumping the euro will dramatically increase household costs at a time when social welfare payments will have to be slashed, as Ireland will have no access to international credit markets.

I think it is important to note that the idea that Ireland should devalue and leave the Euro for me only applies in a situation where Ireland is about to default anyway and since our banks are dependent on the state, that they are in a state of collapse also. At this point, we are out of the credit markets anyway and are relying purely on what we can export. This is the point at which we should cut loose.

Dumping the euro will also crush the middle class, and destroy what is left of the banking system. If banks keep debt and savings in euros, but people are paid in punts, most people will never be able to afford to pay of their mortgages. If banks completely switch over to punts, perhaps some debt could be inflated away, but people would theoretically lose their savings...and I say theoretically because the minute the government announces that they are switching to punts, people will race to withdraw their euro savings and move them abroad.

No, all savings as well as debts to Irish banking operations should be re-denominated. Debts by Irish banks to foreign institutions should also be re-denominated as part of the default.

Again, dumping the euro would be fiscal suicide.

Again, all this is from the point of view of taking the Morgan Kelly article seriously. That if we're offered the likes of 5% interest in a bailout arrangement, we're heading for a situation where we default anyway and we're out of the credit markets.

SkepticOne

ei.sdraob wrote: »

Argentinian problem was much deeper than that running back decades, lookup Peronism

I know but does that mean they should have staid with the dollar instead of devaluing when they did?

ei.sdraob

SkepticOne wrote: »

I know but does that mean they should have staid with the dollar instead of devaluing when they did?

They shouldn't have pegged to it in the first place, their problems were not related to currency but to disastrous political choices made (sound familiar?).

I was recently reading an interesting book which touched on Argentina , their troubles literary go back decades, the country went from having larger economy than France before WW2 to being a developing country, really tragic. An example of why protectionism and import substitution are disastrous policies.

SkepticOne

ei.sdraob wrote: »

They shouldn't have pegged to it in the first place, their problems were not related to currency but to disastrous political choices made (sound familiar?).

You are evading the question here. In 2001 before they had their massive 30% devaluation, their option was to either continue with the peg or devalue. They did not have the option to go back in time so that they never pegged in the first place just like we don't have the option now of going back in time till before we joined the Euro. So the question remains: were they right to devalue when they did?

ei.sdraob

SkepticOne wrote: »

You are evading the question here. In 2001 before they had their massive 30% devaluation, their option was to either continue with the peg or devalue. They did not have the option to go back in time so that they never pegged in the first place just like we don't have the option now of going back in time till before we joined the Euro. So the question remains: were they right to devalue when they did?

I am not evading the question, I pointed out in this thread that Argentine problems had very little to do with the currency peg and are due to issues that go back a long time. Same way as changing a bandage doesn't suddenly heal a knife wound.

You are trying to compare Ireland and Argentina and I am trying to tell you that the two are beyond comparison, your question is based on a false premise.
For example we had a fairly healthy economy heading into the euro on a crest of export led boom in late 90s, Argentina on the other hand had 2-3 decades of hyperinflation (5000% some years) due to political mismanagement and money printing. Pegging to the dollar in early 90s solved the hyperinflation problem somewhat but Argentinas underlying problem wasnt hyperinflation, that was just a symptom of the chronic mismanagement of what was once a world leading economy.
Apples vs Oranges I say

ei.sdraob

BTW @ ScepticOne I have argued for the euro before, but now I think a third option could be pursues

dual-currency, pay PS/Welfare etc in local currency which must be accepted within the republic :P

It doesnt have to be an either/or choice could take the best of both worlds

hinault

I don't believe that Ireland can/will leave the Eurozone.

If we leave the Eurozone the cons vastly outweigh the pros, in such a move.


Citizens need to remember that our policymakers in Ireland have brought us to this present situation.
Blaming "de Lehmans" or "de EU" for our present difficulties make no sense.

We're responsible for where we find ourselves now.

SkepticOne

hinault wrote: »

I don't believe that Ireland can/will leave the Eurozone.

If we leave the Eurozone the cons vastly outweigh the pros, in such a move.


Citizens need to remember that our policymakers in Ireland have brought us to this present situation.
Blaming "de Lehmans" or "de EU" for our present difficulties make no sense.

We're responsible for where we find ourselves now.

Arguing to leave the Euro is not the same as blaming external factors such as Lehmans or the EU. We, after all, chose to enter the Euro. We could have opted out like Britain or Denmark, but that does not mean that it is right to stay in it forever even though it was our choice in the first place.

hinault

SkepticOne wrote: »

Arguing to leave the Euro is not the same as blaming external factors such as Lehmans or the EU. We, after all, chose to enter the Euro. We could have opted out like Britain or Denmark, but that does not mean that it is right to stay in it forever even though it was our choice in the first place.

As I said leaving the Euro now would present us with a lot more "cons" than "pros".

I made reference to Lehmans because there seems to be a viewpoint that we're in this current situation due to external factors.

I would contend that we're in this current situation because of our own actions primarily.

SkepticOne

hinault wrote: »

As I said leaving the Euro now would present us with a lot more "cons" than "pros".

I made reference to Lehmans because there seems to be a viewpoint that we're in this current situation due to external factors.

I would contend that we're in this current situation because of our own actions primarily.

I'm not disputing the fact that you have the opinion that the cons outweigh the pros. I disagree with it but you are entitled to your opinion nevertheless. My point is that unless someone brought Lehmans up in this thread the fact that some people (mainly the pro-Euro government as far as I can see) believe that Lehmans is to blame is largely irrelevant in this discussion.

hinault

SkepticOne wrote: »

I'm not disputing the fact that you have the opinion that the cons outweigh the pros. I disagree with it but you are entitled to your opinion nevertheless. My point is that unless someone brought Lehmans up in this thread the fact that some people (mainly the pro-Euro government as far as I can see) believe that Lehmans is to blame is largely irrelevant in this discussion.

I didn't suggest that someone brought up Lehmans in this thread.

I made a general point that the decisions taken by the policymakers in this country are responsible for delivering us to where we now find ourselves.

Scofflaw

ei.sdraob wrote: »

BTW @ ScepticOne I have argued for the euro before, but now I think a third option could be pursues

dual-currency, pay PS/Welfare etc in local currency which must be accepted within the republic :P

It doesnt have to be an either/or choice could take the best of both worlds

The Irish renminbi!

amused,
Scofflaw

SkepticOne

ei.sdraob wrote: »

You are trying to compare Ireland and Argentina and I am trying to tell you that the two are beyond comparison, your question is based on a false premise. For e ample we had a fairly healthy economy heading into the euro on a crest of export led boom in late 90s, Argentina on the other hand had 2-3 decades of hyperinflation (5000% some years) due to political mismanagement and money printing. Pegging to the dollar in early 90s solved the hyperinflation problem somewhat but Argentinas underlying problem wasnt hyperinflation, that was just a symptom of the chronic mismanagement of what was once a world leading economy.
Apples vs Oranges I say

Different economies but both suffered high unemployment and banking difficulties when their currency became seriously overvalued and the economy failed to adjust. I don't think Ireland entered into the Euro at the right time either (not that i would have expected the government of the time to realise this). We were at the beginnings of the property bubble and had house price growth of up to 30%. It was widely known by people that when Ireland joined interest rates would come down sharply and this further inflated the bubble.

View

Scofflaw wrote: »

The rules can be bent, but can't be broken without legal consequences - and even the bending has been the subject of legal challenge.

cordially,
Scofflaw

SkepticOne wrote: »

It would happen through a process of renegotiation like the changes we have seen so far which would have seemed unthinkable a few years ago. If the Euro doesn't suit Ireland, then it also doesn't suit other Eurozone countries to have Ireland in the Euro.

A process of renegotiation would take months if not years. Even at the best of time, EU negotiations are slow moving.

As it is, I am not sure that a renegotiation called largely because we can't get our budget math right would be very credible.

If the other member states have to engage in a renegotiation with us on that, they might as well renegotiate Ireland's right to access the EU's internal market tariff free at the same time - that, after all, would be no more or less a tearing up of a clause of the EU Treaties as creating a special mechanism for Ireland to leave the Euro would be (since both the tariff free internal market and the Euro are stated objectives of the EU).

SkepticOne

View wrote: »

A process of renegotiation would take months if not years. Even at the best of time, EU negotiations are slow moving.

As it is, I am not sure that a renegotiation called largely because we can't get our budget math right would be very credible.

If the other member states have to engage in a renegotiation with us on that, they might as well renegotiate Ireland's right to access the EU's internal market tariff free at the same time - that, after all, would be no more or less a tearing up of a clause of the EU Treaties as creating a special mechanism for Ireland to leave the Euro would be (since both the tariff free internal market and the Euro are stated objectives of the EU).

I think these are fair points but I also think there's an underlying assumption in your comments that keeping Ireland in the Euro is something that the other EU member states actually want at all costs both to themselves and Ireland.

It is more likely that the large core economies want peripheral economies like Ireland in the Euro only if they can handle the fiscal discipline that that demands.

If they can't - and I think Ireland falls into this category - then it is not only in Ireland's interest to leave but also in the interests of other Eurozone countries to assist us to leave as keeping keeping us in creates instability.

Look at these bailout plans. Initially such bailouts were prohibited under EU rules. Later they were seen as a necessary evil. Now Ireland is actually under pressure to accept a bailout.

There's nothing particularly strange about the position Ireland is in. We have a pretty poor government and a history of poor governments. However our membership of a currency union means that the poor decision making of governments leads to more unemployment and business failures than would be the case if we had a floating currency.

The Euro was a noble experiment but it is time for us to realise that it was unrealistic to expect it to work simultaneously for the likes of Germany while at the same time working for Ireland and Portugal. Time to move on.