Leaving the €uro: Pros & Cons?

View

SkepticOne wrote: »

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 an assumption based on the stated objectives of the EU (See Article 3 TEU).

Whereas your assumption is largely based on the idea that member states put clauses in the EU Treaties because they want to figure out how to breech them later...

SkepticOne wrote: »

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 is no clause which prohibits bailouts. There IS a clause which prohibits one member state taking over the debts of another member state. You are welcome to point out where this has been breeched - Given someone a loan is not taking over their debts for the record.

SkepticOne wrote: »

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.

If, of course, you ignore the evidence from the 1980's when we had much higher unemployment and business failures than we have today...

SkepticOne wrote: »

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.

Sure. Just as soon as you persuade the other member states to change the EU Treaties and get a democratic mandate from the electorate here for that in a referendum.

Based on your stated position here, I look forward to seeing you explain to the electorate why a new Irish pound could be realistically expected to work for Leitrim and Dun Laoghaire-Rathdown given their clear disparate economic performances over the decades...

SkepticOne

View wrote: »

It is an assumption based on the stated objectives of the EU (See Article 3 TEU).

Whereas your assumption is largely based on the idea that member states put clauses in the EU Treaties because they want to figure out how to breech them later...

What the lesson with the bailout tells us is that EU rules relflect the national interests of member states at the time they were created. Once they stop being in the national interest of the more influential member states then they are either ignored or ways are thought up of getting around them. Another example would be Ireland setting up a "special purpose vehicle" as a means of getting around EU rules on state aid to banks. This was allowed by the EU because it was in the interest of certain core economies to have the Irish tax payer prop up Irish banks.

There is no clause which prohibits bailouts. There IS a clause which prohibits one member state taking over the debts of another member state. You are welcome to point out where this has been breeched - Given someone a loan is not taking over their debts for the record.

But the intent of that prohibition was that bailouts were not going to be part of the Eurozone. The prohibition was to prevent individual member states getting around that. In the end the EU itself set up a mechanism when hitherto they would have been opposed to it on principle.

If, of course, you ignore the evidence from the 1980's when we had much higher unemployment and business failures than we have today...

But Ireland did not have a fully floating currency. We were part of the ERM and in fact were forced to exit it briefly in order to devalue in the early nineties. Britain exited it and did not see the need to return.

murphaph

Scofflaw wrote: »

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.

Sounds a bit like East Germany tbh. They had such rules for visitors and they got 1 Mark for 1DM!!

Leaving the Euro is simply not an option if we want to stay part of the 1st world IMO.

We just need to grow up as a nation!

murphaph

SkepticOne wrote: »

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.

Surely it's more in our interests to learn a bit of fiscal discipline?

SkepticOne

murphaph wrote: »

Surely it's more in our interests to learn a bit of fiscal discipline?

If you want to see Ireland punished to a greater extent than would otherwise be the case then I would agree with you that the a currency union is the way to go, but we must be honest with ourselves as to whether that is what we want. I don't think the majority of people opposing leaving the Euro are doing so in order that the country be punished properly for fiscal indiscipline. I could be wrong but I don't get the impression that that is the case. It is possible that they are not consciously acknowledging it though.

SkepticOne

murphaph wrote: »

Sounds a bit like East Germany tbh. They had such rules for visitors and they got 1 Mark for 1DM!!

Leaving the Euro is simply not an option if we want to stay part of the 1st world IMO.

We just need to grow up as a nation!

This is another not very good example for those against a floating currency. The East Germans operated a sort of currency peg with the West German mark. Officially, it was one to one with the DM as you point out. However in reality, the true exchange rate was very different and unofficially you could get several East German marks for one DM with money changers operating on the black market. They would have been far better off to allow the currency to float on the markets. Sure it would not have been worth much, but the pretence that it was worth 1 DM never did them any good.

The sort of arguments against allowing the ost mark to float would have been similar to the sorts of arguments people here might make against leaving the Euro: "Oh, the value of our savings will go down" or "Oh all our imports will get very expensive". I think we can see though that they were merely deluding themselves just as we are if we think the value of our wealth lies in the value of our currency.

The truth is that we are wealthy (or not) not because of the currency we use but because our businesses are capable of exporting goods and services abroad and bringing wealth into the country in exchange.

K-9

SkepticOne wrote: »

If you want to see Ireland punished to a greater extent than would otherwise be the case then I would agree with you that the a currency union is the way to go, but we must be honest with ourselves as to whether that is what we want. I don't think the majority of people opposing leaving the Euro are doing so in order that the country be punished properly for fiscal indiscipline. I could be wrong but I don't get the impression that that is the case. It is possible that they are not consciously acknowledging it though.

Well, did our last devaluation work?

Devaluing is a short term measure. Staying in the Euro and seriously addressing competitiveness is the way to go in that regard. We already have improved it in the last 2 years, more needs to be done.

murphy93

Oh no please stick with the Euro hate the thought of all those again

caseyann

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.

Can i just say first off,you contradict yourself.First you say our policy makers have brought us to our present situation.And then you say we are responsible for where we find ourselves now.
Possibly the people who voted Fianna fail are at fault for the countries economic crisis,but only to the amount of trusting the people who were meant to be looking out for the public and the countries best interests.And they hid it well with the smoke screen of plenty of jobs and false money.
So the people arent to blame at all,but the people who falsified and used promises that were not even available and took advantage of the name of Fianna fail.
First off i was against and have been all along the euro acceptance,on top of that i was also completely opposed to Fianna fail two elections ago.It was in the air you could smell the failure and the lies and the back handers and the false wealth in Éire.
I would say if we left the euro currency it would not make one bit of a difference to current climate,and we would have to build it back up as we have to with the euro,only difference is we could make the Irish punt worth more if the people and or establishments worked at it.And then we wouldnt be caught in such a conundrum,like the voting yes to the treaty made no difference to the countries economy.Even though they said it would,and then retracted the statement when it was voted in.
Been sold lies all along is what the Irish have been and other EU members,and people are still chewing it up.
Concocting of false fears and possibilities is what they do best,time to listen to the facts and see whats happening right in front of your eyes.


There is no pros and cons as either way the country needs to be fixed and there is a big hole to be dug out of.
I am for one against keeping the euro,and have always thought the currency been the same in so many countries devalues it and makes the markets to close together for proper profits.

caseyann

murphy93 wrote: »

Oh no please stick with the Euro hate the thought of all those again

All what?:p

SkepticOne

murphaph wrote: »

Surely it's more in our interests to learn a bit of fiscal discipline?

K-9 wrote: »

Well, did our last devaluation work?

Devaluing is a short term measure. Staying in the Euro and seriously addressing competitiveness is the way to go in that regard. We already have improved it in the last 2 years, more needs to be done.

I will address both of these together because I think the same underlying sentiment is behind them which is that fiscal discipline is an end in itself. Therefore the current hardship and the hardship to come are to be welcomed because they will teach the Irish through bankruptcy and unemployment the virtues of fiscal discipline.

However why not make the alleviation of hardship the goal? Then fiscal discipline becomes important not as an end in itself but as a means of achieving the goal. Seen in this light, it makes no sense to welcome the hardship to come due to our membership of a currency union since that same hardship is the thing we are trying to avoid.

murphaph

SkepticOne wrote: »

If you want to see Ireland punished to a greater extent than would otherwise be the case then I would agree with you that the a currency union is the way to go, but we must be honest with ourselves as to whether that is what we want. I don't think the majority of people opposing leaving the Euro are doing so in order that the country be punished properly for fiscal indiscipline. I could be wrong but I don't get the impression that that is the case. It is possible that they are not consciously acknowledging it though.

Surely there's an argument that says a country that has been run the way Ireland has been run, deserves to be punished? We the people elected FF and their inflamatory policies time and time again. Why should the electorate not be on the hook for their decision to vote FF?

Benchmarking, increasing social welfare, skyrocketing housing prices, inflation....none of these things were a secret to the electorate, but hardly a word was said...people (not everyone!) just kept electing the government behind it all.

There was no popular call for a restrained approach. So, again, why should Ireland and the Irish not be "punished" (ie, working for what they're really worth compared to their EU neighbours)?

Many people blame the second world war on the fact that Germany was never occupied when they lost the first world war. Germans were spun the lie that "jews and international money men etc." had somehow orchestrated the whole surrender of Germany and that Germany was not really defeated at all. This was popularly believed in the 1930s. We need to be "occupied" by the IMF to show the Irish people that there is no easy pickings. Property is not a way to get rich quick. Ot is just concrete, timber and steel. We all know that there are still a large number of people out there waiting for boom time prices to return. :rolleyes:

Once again, I know that not everybody fell for the hype. But enough did.

jimmycrackcorm

How does the US manage the dollar for different states in comparison? IIRC California was going bust not so long ago and didn't New York have to get a bailout at one point?

Scofflaw

SkepticOne wrote: »

I will address both of these together because I think the same underlying sentiment is behind them which is that fiscal discipline is an end in itself. Therefore the current hardship and the hardship to come are to be welcomed because they will teach the Irish through bankruptcy and unemployment the virtues of fiscal discipline.

However why not make the alleviation of hardship the goal? Then fiscal discipline becomes important not as an end in itself but as a means of achieving the goal. Seen in this light, it makes no sense to welcome the hardship to come due to our membership of a currency union since that same hardship is the thing we are trying to avoid.

The hardship is being welcomed - insofar as it is being welcomed - because there seems no other way of imposing fiscal discipline on the state.

I'm sure that we would at least in theory welcome even more fiscal discipline without hardship.

cordially,
Scofflaw

MrVestek

Panrich wrote: »

What effect would this have on tracker mortgages?

I have no idea... I *still* don't know what a tracker mortgage is.

SkepticOne

murphaph wrote: »

Surely there's an argument that says a country that has been run the way Ireland has been run, deserves to be punished? We the people elected FF and their inflamatory policies time and time again. Why should the electorate not be on the hook for their decision to vote FF?

I'm just going to address this single point because I think it is at the core of where we differ.

What this is about, it seems, is more than just whether or not to stay in or out of the Euro.

In short, no. Ireland does not deserve punishment. If we have run the country badly then sure we must accept the consequences. But those consequences must be those that remain after we have done everything in our power to minimise the pain. We must at all times be seeking to alleviate hardship on the population in a sustainable way.

These consequences after we have done our best to minimise their damaging effects are not the same as punishment. The country should never seek punishment in my view.

But you are entitled to your priorities and I can see that if your priorities are to have Ireland punished then staying in the Euro is one way ensuring this.

SkepticOne

Scofflaw wrote: »

The hardship is being welcomed - insofar as it is being welcomed - because there seems no other way of imposing fiscal discipline on the state.

I'm sure that we would at least in theory welcome even more fiscal discipline without hardship.

cordially,
Scofflaw

I suspect you share that view too. But standing back from it do you not see it as a bit bizarre? A bit masochistic?

Scofflaw

SkepticOne wrote: »

I suspect you share that view too. But standing back from it do you not see it as a bit bizarre? A bit masochistic?

In the short term, it may well seem so - but in the long term, not really. If fiscal discipline has to be imposed by hardship, then at least once the hardship is over, we can hope that the fiscal discipline remains - and that way, maybe when the economy recovers the state won't be so disposed to blow it all on short term gains and political opportunism.

The second alternative, that we undergo the hardship without learning anything, is certainly possible, if a little depressing to contemplate, and the third alternative, that we might somehow achieve fiscal discipline without needing hardship as a teacher, lacks any supporting evidence in Irish history.

cordially,
Scofflaw

BeeDI

Scofflaw wrote: »

The hardship is being welcomed - insofar as it is being welcomed - because there seems no other way of imposing fiscal discipline on the state.

I'm sure that we would at least in theory welcome even more fiscal discipline without hardship.

cordially,
Scofflaw

the Irish psyche, is naturally conditioned for hardship. Our great great grandchildren will be singing ballads about their ancestral hero who withstood the torture of the IMF etc,.

murphaph

SkepticOne wrote: »

I'm just going to address this single point because I think it is at the core of where we differ.

What this is about, it seems, is more than just whether or not to stay in or out of the Euro.

In short, no. Ireland does not deserve punishment. If we have run the country badly then sure we must accept the consequences. But those consequences must be those that remain after we have done everything in our power to minimise the pain. We must at all times be seeking to alleviate hardship on the population in a sustainable way.

These consequences after we have done our best to minimise their damaging effects are not the same as punishment. The country should never seek punishment in my view.

But you are entitled to your priorities and I can see that if your priorities are to have Ireland punished then staying in the Euro is one way ensuring this.

See my post above. If Germany had been occupied after WWI, her people may have been a lot less likely to support a war monger like Adolf Hitler, who told them they didn't really lose WWI at all!

So, the hardship that was spared Germany after WWI, was reaped a thousand times over just 30 years later with the almost complete destruction of their country (and rightly so of course).

Sometimes, the hard lessons are indeed the best!

SkepticOne

Scofflaw wrote: »

In the short term, it may well seem so - but in the long term, not really. If fiscal discipline has to be imposed by hardship, then at least once the hardship is over, we can hope that the fiscal discipline remains - and that way, maybe when the economy recovers the state won't be so disposed to blow it all on short term gains and political opportunism.

The second alternative, that we undergo the hardship without learning anything, is certainly possible, if a little depressing to contemplate, and the third alternative, that we might somehow achieve fiscal discipline without needing hardship as a teacher, lacks any supporting evidence in Irish history.

So in your view Cowen should not be seeking a way out of the present difficulties that minimises the pain the country needs to endure?

murphaph

SkepticOne wrote: »

So in your view Cowen should not be seeking a way out of the present difficulties that minimises the pain the country will endure or should be seeking to add to the pain in some way the same being true of a future taoiseach in order to teach the electorate a lesson?

It's not simply a case of trying to teach the electorate a lesson (that clearly needs doing though). It is a case of trying to remain within a common currency, that when the rules are followed by all, brings many more benefits than disbenefits.

You want to abandon the Euro in the hope it is a less painful "way out". I believe the Euro is actually worth fighting for (though I am not an EU integrationist and I was a no voter wrt Lisbon). The Euro brings a heap of benefits to a country like Ireland wrt trade. A yo-yo mickey mouse Punt Nua would bring very few benefits that I can see.

Sometimes, the good things are worth fighting for. Look at it that way.

southsiderosie

SkepticOne wrote: »

I'm just going to address this single point because I think it is at the core of where we differ.

What this is about, it seems, is more than just whether or not to stay in or out of the Euro.

In short, no. Ireland does not deserve punishment. If we have run the country badly then sure we must accept the consequences. But those consequences must be those that remain after we have done everything in our power to minimise the pain. We must at all times be seeking to alleviate hardship on the population in a sustainable way.

These consequences after we have done our best to minimise their damaging effects are not the same as punishment. The country should never seek punishment in my view.

But you are entitled to your priorities and I can see that if your priorities are to have Ireland punished then staying in the Euro is one way ensuring this.

Ireland is going to be punished financially whether it stays in the eurozone or leaves. The markets are either going to attack the interest rates or the new currency (and probably both in the case of leaving the euro). We clearly differ on which is worse, so there is no point in repeating the argument.

There is no inherent reason why Ireland cannot have a small, open successful economy within the eurozone - the only limitation is domestic politics.

The only way I could see Ireland surviving on its own would be for it to adopt a Hong Kong or Singapore style of fiscal and government policy: zero regulation, no minimum wages, glorious place to set up shop and do business. However, this would probably require a level of government heavy-handedness that most voters would likely be uncomfortable with.

Either Ireland can be at the frontier of Wild West brass-knuckles capitalism (and I'm not sure it could even do that for cultural reasons), and possible carve out a niche for itself within overly-regulated high-tax Europe, or it can play by the rules. Unfortunately I think that voters would be uncomfortable with the former, and government is seemingly incapable of the latter.

SkepticOne

murphaph wrote: »

See my post above. If Germany had been occupied after WWI, her people may have been a lot less likely to support a war monger like Adolf Hitler, who told them they didn't really lose WWI at all!

I don't want to get into a big discussion about history but it is known that the negotiated surrender and the reparations (punishment) that Germany underwent was one of the motivating factors for Hitler. Pershing argued against a negotiated armistice in favour of unconditional surrender but was overruled. But the point here is that the punishment was the reparations. The unconditional surrender wanted by Pershing was not punishment but rather a demonstration of decisive victory over Germany.

So, the hardship that was spared Germany after WWI, was reaped a thousand times over just 30 years later with the almost complete destruction of their country (and rightly so of course).

Sometimes, the hard lessons are indeed the best!

They did occupy Germany after the second world war but note that rather than punish Germany economically, they assisted with the reconstruction of the German economy through the Marshall plan. The US learned that punishment is not the way to go in these matters.

To bring this forward to the present day. I think some people are taking the same approach of wanting punishment over and above the normal consequences for Ireland. This is strange in my opinion coming from an Irish person. If we had wronged another country, then I could see why they might have it in for us (though I would still regard it as unwise), but that is not the case here. It is interesting.

Scofflaw

SkepticOne wrote: »

So in your view Cowen should not be seeking a way out of the present difficulties that minimises the pain the country needs to endure?

As long as it involves the government learning some fiscal discipline, I'd be perfectly happy if he managed to avoid it entirely - the problem is that I don't think those two outcomes together are possible.

cordially,
Scofflaw

SkepticOne

southsiderosie wrote: »

Ireland is going to be punished financially whether it stays in the eurozone or leaves. The markets are either going to attack the interest rates or the new currency (and probably both in the case of leaving the euro). We clearly differ on which is worse, so there is no point in repeating the argument.

There's two points of view being argued by Euro supporters. What I was taking issue with in the post you are responding to was the question of values and priorities that was being raised. The Euro was being held up as a good thing not because it was going to make things easier for Ireland in the immediate future but because it was going to make things harder and I agree that that is the case although I don't advocate it and disagree with the values that underly that point of view. It is good to see people with this view out in the open though.

However on the practical issue of what is best for the people in Ireland over the next few years, I think there's a few points that haven't been addressed.

There is no inherent reason why Ireland cannot have a small, open successful economy within the eurozone - the only limitation is domestic politics.

The only way I could see Ireland surviving on its own would be for it to adopt a Hong Kong or Singapore style of fiscal and government policy: zero regulation, no minimum wages, glorious place to set up shop and do business. However, this would probably require a level of government heavy-handedness that most voters would likely be uncomfortable with.

Either Ireland can be at the frontier of Wild West brass-knuckles capitalism (and I'm not sure it could even do that for cultural reasons), and possible carve out a niche for itself within overly-regulated high-tax Europe, or it can play by the rules. Unfortunately I think that voters would be uncomfortable with the former, and government is seemingly incapable of the latter.

No I think the opposite is true. Lack of flexibility in the exchange rate forces extreme flexibility in the workforce. And in fact Hong Kong, the example you gave with its peg to the dollar bears this out. You are probably weren't aware that its exchange rate is controlled by committee and only changes occasionally and by small amounts or you would not have used it as an example, but when their property bubble collapsed, since their currency was not going to devalue, it was only their extreme flexibility in their workforce that prevented mass unemployment. I think Morgan Kelly has an article where he makes this point.

Again, some people are in favour of the Euro because it forces this sort of flexibility to happen in Ireland. Those that want to see the unions confronted for example. But I don't think this is where you are coming from.

southsiderosie

SkepticOne wrote: »

However on the practical issue of what is best for the people in Ireland over the next few years, I think there's a few points that haven't been addressed.No I think the opposite is true. Lack of flexibility in the exchange rate forces extreme flexibility in the workforce. And in fact Hong Kong, the example you gave with its peg to the dollar bears this out. You are probably weren't aware that its exchange rate is controlled by committee and only changes occasionally and by small amounts or you would not have used it as an example, but when their property bubble collapsed, since their currency was not going to devalue, it was only their extreme flexibility in their workforce that prevented mass unemployment. I think Morgan Kelly has an article where he makes this point.

Again, some people are in favour of the Euro because it forces this sort of flexibility to happen in Ireland. Those that want to see the unions confronted for example. But I don't think this is where you are coming from.

My parents live in Hong Kong, so I am very aware of how their economy works, hence my point about no labor regulations combined with government heavy-handedness.

At this point, there are two realistic options and one not-so-realistic one.

1. Staying with the euro: The EU model
What it is - some social protection within strict budget confines (but not the current system); will probably have to raise taxes and converge more with Continental European states, but can salvage some social programs; some additional loss of autonomy to the EU.
Result - slower growth in the short to medium term, but stability over the long term.
Likelihood - Odds are good, but weakening

2. Dumping the euro, version 1: The Hong Kong/Wild West model
What it is - scrap social programs and labor regulations, gut unions, make starting/winding down a business simple; with complete economic autonomy, can maintain a low tax/flat tax system, completely open to trade; the tradeoff is careful government management of fiscal/monetary policy - i.e. total autonomy but with big-time responsibility.
Result: inflow of investment, macroeconomic stability but more labor market uncertainty and limited social safety nets
Likelihood: not very, since the government is not disciplined enough and, frankly, neither is the workforce. Would definitely require restructuring of political institutions (starting with an end to STV). Plus there seems to be a low appetite for risk in Ireland outside of property speculation.

3. Dumping the euro, version 2: The Banana Republic model
What it is - Essentially flout the Unholy Trinity of economics until the bottom falls out: steer public funds to political goodies, when crisis hits blame the IMF, imposition of harsh austerity prompts riots and/or emigration, things settle, lather, wash, rinse, repeat.
Result - wild macroeconomic fluctuations; poor investment climate
Likelihood - it's already happened, and it can certainly happen again. If Ireland dumps the euro, this is pretty much a guarantee.

Scofflaw

SkepticOne wrote: »

There's two points of view being argued by Euro supporters. What I was taking issue with in the post you are responding to was the question of values and priorities that was being raised. The Euro was being held up as a good thing not because it was going to make things easier for Ireland in the immediate future but because it was going to make things harder and I agree that that is the case although I don't advocate it and disagree with the values that underly that point of view. It is good to see people with this view out in the open though.

However on the practical issue of what is best for the people in Ireland over the next few years, I think there's a few points that haven't been addressed.No I think the opposite is true. Lack of flexibility in the exchange rate forces extreme flexibility in the workforce. And in fact Hong Kong, the example you gave with its peg to the dollar bears this out. You are probably weren't aware that its exchange rate is controlled by committee and only changes occasionally and by small amounts or you would not have used it as an example, but when their property bubble collapsed, since their currency was not going to devalue, it was only their extreme flexibility in their workforce that prevented mass unemployment. I think Morgan Kelly has an article where he makes this point.

Again, some people are in favour of the Euro because it forces this sort of flexibility to happen in Ireland. Those that want to see the unions confronted for example. But I don't think this is where you are coming from.

I wouldn't consider that an accurate summary of other people's position at all. We're in favour of the euro because it reduces the hardship but comes with the sort of oversight/peer group review/reality check that the eurozone mechanisms provide.

A free-floating punt nua, on the other hand, provides plenty of hardship, probably a good deal more than the euro, while providing no such advantages - instead, it leaves our government to flail about on their own, almost certainly making a very bad situation amazingly worse.

We're in big enough seas to make the enormous euro liner wobble alarmingly, and your solution seems to be to abandon ship and set sail in a small and leaky lifeboat with Captain Cowen at the helm. Oddly enough, I've actually been physically in a very closely analogous position, and I'm in favour of staying aboard and trying to put out the fire this time too.

cordially,
Scofflaw

Mr.Micro

whatever medicine Dr. €uro prescribes we will have to take. With us having the Euro as our currency will mean that our money will be worth something. We cannot ever go back to the Punt, as a small nation with incompetent politicians and a corrupt financial system we would be finished.

SkepticOne

southsiderosie wrote: »

My parents live in Hong Kong, so I am very aware of how their economy works, hence my point about no labor regulations combined with government heavy-handedness.

I know Hong Kong has a very unregulated economy but why are you using it as an example of a free floating currency when it has a peg with the dollar as I have pointed out? The rest of your assertions in your post are invalid, imo, until you address this point.

K-9

SkepticOne wrote: »

I will address both of these together because I think the same underlying sentiment is behind them which is that fiscal discipline is an end in itself. Therefore the current hardship and the hardship to come are to be welcomed because they will teach the Irish through bankruptcy and unemployment the virtues of fiscal discipline.

However why not make the alleviation of hardship the goal? Then fiscal discipline becomes important not as an end in itself but as a means of achieving the goal. Seen in this light, it makes no sense to welcome the hardship to come due to our membership of a currency union since that same hardship is the thing we are trying to avoid.

Well German wages have dropped about 15% in the last decade so it can de done and it isn't necessarily a bad thing. We have to aim to be fiscally responsible countries like them, not quick fix after quick fix that never work.

southsiderosie

SkepticOne wrote: »

I know Hong Kong has a very unregulated economy but why are you using it as an example of a free floating currency when it has a peg with the dollar as I have pointed out? The rest of your assertions in your post are invalid, imo, until you address this point.

I'm using it as an example of decoupling from the euro, not as a free-floating currency. The difference is that Ireland would be able to preserve some autonomy (which seems to be an issue for some people) but the government would have to be disciplined (which I think is impossible, hence why I said it is an unlikely option). I think the only opportunities for growth outside of the eurozone are for it to basically throw the country as wide open as possible to investment and entrepreneurship, but that will not take away the need for the government to discipline itself and the population - it would only heighten it. But at least it could do so on its own terms.

SkepticOne

southsiderosie wrote: »

I'm using it as an example of decoupling from the euro, not as a free-floating currency. The difference is that Ireland would be able to preserve some autonomy (which seems to be an issue for some people) but the government would have to be disciplined (which I think is impossible, hence why I said it is an unlikely option). I think the only opportunities for growth outside of the eurozone are for it to basically throw the country as wide open as possible to investment and entrepreneurship, but that will not take away the need for the government to discipline itself and the population - it would only heighten it. But at least it could do so on its own terms.

But the peg with the dollar imposes the same sort of problems that a country in a currency union would have. If Ireland were to leave the Euro and peg to the dollar then yes we would need to have a flexible economy like Hong Kong, but for exactly the same reasons we need to have a flexible economy while in the Euro. With a floating currency (and I'm not saying everything is rosy in such a situation) some of that flexibility is carried by the currency itself. A collapse of a bubble will lead to a lowering of the value of the currency. But this introduces some competitiveness and allows recovery. If you have a currency peg like Hong Kong or are in a currency union like Ireland then extra (not less as I think you are arguing) flexibility is required.

SkepticOne

K-9 wrote: »

Well German wages have dropped about 15% in the last decade so it can de done and it isn't necessarily a bad thing. We have to aim to be fiscally responsible countries like them, not quick fix after quick fix that never work.

But that is a comparitively slow adjustment and remember that being a large core economy, the ECB are going to be adjusting interest rates much more to suit them than they would be for Ireland.

southsiderosie

SkepticOne wrote: »

But the peg with the dollar imposes the same sort of problems that a country in a currency union would have. If Ireland were to leave the Euro and peg to the dollar then yes we would need to have a flexible economy like Hong Kong, but for exactly the same reasons we need to have a flexible economy while in the Euro. With a floating currency (and I'm not saying everything is rosy in such a situation) some of that flexibility is carried by the currency itself. A collapse of a bubble will lead to a lowering of the value of the currency. But this introduces some competitiveness and allows recovery. If you have a currency peg like Hong Kong or are in a currency union like Ireland then extra (not less as I think you are arguing) flexibility is required.

What I am saying is that if Ireland goes off of the euro, its options are to create a Hong Kong-style system which has a highly disciplined government and pretty much no regulation, or the default Irish system, which is economic chaos.

Despite the fact that there is a currency peg, the Hong Kong system is not the same as the euro system because the tax labor and wage regulatory framework is more stringent within the EU than it would be outside of it. But in either scenario, the Irish government has to be more fiscally responsible.

Again, we need to keep the Unholy Trinity in mind: Ireland has an open economy and that is presumably not going to change. Therefore, they can have a fixed currency or they can control monetary policy. They cannot do both. As many others on this thread have pointed out, Ireland has a terrible history of self-managing its economy, and I would guess that and short-term gains from improved competitiveness would be lost in the long run due to an increase in macroeconomic instability. At the end of the day, even going off of the euro, Ireland is not going to be as competitive on cost and wages as Eastern Europe, so why introduce so much instability into the system?

Scofflaw

southsiderosie wrote: »

I'm using it as an example of decoupling from the euro, not as a free-floating currency. The difference is that Ireland would be able to preserve some autonomy (which seems to be an issue for some people) but the government would have to be disciplined (which I think is impossible, hence why I said it is an unlikely option). I think the only opportunities for growth outside of the eurozone are for it to basically throw the country as wide open as possible to investment and entrepreneurship, but that will not take away the need for the government to discipline itself and the population - it would only heighten it. But at least it could do so on its own terms.

At least to the extent that those terms aren't dictated by the need to put the interests of business above all else.

cordially,
Scofflaw

SkepticOne

southsiderosie wrote: »

What I am saying is that if Ireland goes off of the euro, its options are to create a Hong Kong-style system which has a highly disciplined government and pretty much no regulation, or the default Irish system, which is economic chaos.

But you are assuming that Ireland is immediately going to enter into a peg with some other currency. The whole point of leaving the Euro would be to get away from that.

Despite the fact that there is a currency peg, the Hong Kong system is not the same as the euro system because the tax labor and wage regulatory framework is more stringent within the EU than it would be outside of it. But in either scenario, the Irish government has to be more fiscally responsible.

But these rules are there to try and mitigate the problems inherent in having multiple countries with different economies but one currency. What is proposed is to move away from that.

Again, we need to keep the Unholy Trinity in mind: Ireland has an open economy and that is presumably not going to change. Therefore, they can have a fixed currency or they can control monetary policy.

They cannot do both.

Where did I say they should try to do both? I'm suggesting that they leave the fixed currency either in the form of a currency union or a peg to another currency.

As many others on this thread have pointed out, Ireland has a terrible history of self-managing its economy, and I would guess that and short-term gains from improved competitiveness would be lost in the long run due to an increase in macroeconomic instability. At the end of the day, even going off of the euro, Ireland is not going to be as competitive on cost and wages as Eastern Europe, so why introduce so much instability into the system?

But there's no evidence that currency unions in themselves lead to macroeconomic stability in themselves. It was always recognised that there were inherent stability issues with currency union and this is why the stability and growth pact was created which we now see was neither sufficient nor enforced properly.

southsiderosie

SkepticOne wrote: »

But you are assuming that Ireland is immediately going to enter into a peg with some other currency. The whole point of leaving the Euro would be to get away from that.But these rules are there to try and mitigate the problems inherent in having multiple countries with different economies but one currency. What is proposed is to move away from that.Where did I say they should try to do both? I'm suggesting that they leave the fixed currency either in the form of a currency union or a peg to another currency. But there's no evidence that currency unions in themselves lead to macroeconomic stability in themselves. It was always recognised that there were inherent stability issues with currency union and this is why the stability and growth pact was created which we now see was neither sufficient nor enforced properly.

A currency peg is not the same thing as a currency union. Most pegs are banded, and are occasionally re-calibrated; as long as this is not done willy-nilly it is generally not a problem. Currency unions are rare, but currency pegs are common, and when governments don't spend money like water, they are generally useful because they generate policy stability. If Ireland were to have its own floating currency, given the history of its government, I do not see where there would be a modicum of stability.

SkepticOne

I mentioned an article that talked about Hong Kong as analogous in some respects to Ireland in the eurozone. It was actually by Alan Ahearne not Morgan Kelly but here's an extract neverthess:

In the event that Irish house prices do fall, economic flexibility will be crucial in containing any fallout.

In this regard, some lessons can be drawn from Hong Kong's experience in the late 1990s.Hong Kong's currency board arrangement means that the authorities there have essentially no control over domestic interest rates or the exchange rate. When property prices collapsed in 1997 and 1998, it was sustained declines in nominal wages that eventually restored the economy's competitiveness. But declines in nominal wages are rarely seen in industrial countries, and are usually vigorously opposed by trade unions. Whether the wage-formation process in Ireland is up to the task of rebalancing the Irish economy in the aftermath of a property crash is very much an open question. URL="http://www.daft.ie/discussions.daft?dcn[discussion_id]=114319&dcn[forum_id]=4"]source[/URL

Note that this was written in 2005 before the full extent of the bubble was realised by most economists. You can see that his point here is that extra flexibility is required from the workforce in a currency union such as the one Ireland is in or a currency board such as the one operated by Hong Kong.

southsiderosie

SkepticOne wrote: »

I mentioned an article that talked about Hong Kong as analogous in some respects to Ireland in the eurozone. It was actually by Alan Ahearne not Morgan Kelly but here's an extract neverthess:

Note that this was written in 2005 before the full extent of the bubble was realised by most economists. You can see that his point here is that extra flexibility is required from the workforce in a currency union such as the one Ireland is in or a currency board such as the one operated by Hong Kong.

I have never said it wasn't - in fact I've said they would need to be even more open than before. Why do you keep repeating this point?

You seem to think that the shift to a floating currency will somehow curb the pain of wage deflation and unemployment because the currency will bear the brunt of the government's bad policies. But workers - and especially low wage workers - bear the brunt as well. If countries want to run ridiculous fiscal and monetary policies, but maintain employment levels, they they are going to have to be satisfied with high levels of inflation. Again, Argentina is a case in point: inflation has been running at over 20% there for almost a decade, no matter how much the government tries to fudge the figures. This would be DISASTROUS for Ireland, which imports over 75% of its food supply, and most of its consumer goods. It would be especially bad for the poor, who spend a higher percentage of their income on food and basics.

You also seem to think that this shift would not have any repercussions from the EU. I would presume that Ireland would lose many of its EU membership benefits if it dropped out of the eurozone, and if these extended to preferential trade access, Ireland could kiss its MNCs goodbye.

SkepticOne

southsiderosie wrote: »

I have never said it wasn't - in fact I've said they would need to be even more open than before. Why do you keep repeating this point?

Maybe I misunderstood your earlier point. What you said was:

The only way I could see Ireland surviving on its own would be for it to adopt a Hong Kong or Singapore style of fiscal and government policy: zero regulation, no minimum wages, glorious place to set up shop and do business. However, this would probably require a level of government heavy-handedness that most voters would likely be uncomfortable with.

You seem to be arguing here that Ireland if it left the Euro would need to adopt the policies of Hong Kong i.e. have a highly flexible workforce with no minimum wages etc. However Ahearne is pointing out that this need for flexibility in the their economy is due to their currency board with the US dollar and that since Ireland is in a currency union, we therefore need to be like Hong Kong also in this respect.

You seem to think that the shift to a floating currency will somehow curb the pain of wage deflation and unemployment because the currency will bear the brunt of the government's bad policies. But workers - and especially low wage workers - bear the brunt as well.

I do think it will curb the pain somewhat. Not remove the pain altogether. What it does is bring the market to bear on the economy as a whole. It means we don't have to be like Hong Kong in having extreme flexibility in the economy. As it stands, if the economy falters in Ireland to any great extent (as it has) then all the contracts and arrangements (and not just wages) need to be renegotiated.

As an example, businesses have to get in touch with their landlords to try and reduce rents. But these landlords may not believe the problems of the businesses or may have loans of their own that they need to pay off, so they will push their tenants to bankruptcy rather than lower the rents. This is happening in Ireland.

Now some support euro membership precisely because of these problems since membership of a currency union punishes any lack of flexibility in the economy. Although I don't agree with their goal, their reason for supporting the Eurozone is sound, but as far as I can see you are arguing against this position.

If countries want to run ridiculous fiscal and monetary policies, but maintain employment levels, they they are going to have to be satisfied with high levels of inflation.

Yes inflation is a risk. A strong independent central bank is important.

Again, Argentina is a case in point: inflation has been running at over 20% there for almost a decade, no matter how much the government tries to fudge the figures. This would be DISASTROUS for Ireland, which imports over 75% of its food supply, and most of its consumer goods. It would be especially bad for the poor, who spend a higher percentage of their income on food and basics.

Yes I agree it would be bad if inflation were to take off and this is why a strong central bank would be important run by the likes of Honohan who is currently in charge.

You also seem to think that this shift would not have any repercussions from the EU. I would presume that Ireland would lose many of its EU membership benefits if it dropped out of the eurozone, and if these extended to preferential trade access, Ireland could kiss its MNCs goodbye.

Again, I think there's the assumption that everyone wants us in the Eurozone to start with. It is certainly one of the aspirations of the EU to have a single currency for everyone, but these aspirations need to be revised in the light of events. I think most countries would recognise the need for a degree of flexibility in their application.

southsiderosie

SkepticOne wrote: »

Now some support euro membership precisely because of these problems since membership of a currency union punishes any lack of flexibility in the economy. Although I don't agree with their goal, their reason for supporting the Eurozone is sound, but as far as I can see you are arguing against this position.Yes inflation is a risk. A strong independent central bank is important.Yes I agree it would be bad if inflation were to take off and this is why a strong central bank would be important run by the likes of Honohan who is currently in charge. Again, I think there's the assumption that everyone wants us in the Eurozone to start with. It is certainly one of the aspirations of the EU to have a single currency for everyone, but these aspirations need to be revised in the light of events. I think most countries would recognise the need for a degree of flexibility in their application.

If Ireland had control over its interest rates, and an open economy, it would not be able to control the value of its currency. The weak currency is what would drive massive inflation, and there is little that the government could do to control that. Countries with open economies cannot control exchange rates and interest rates at the same time.

SkepticOne

southsiderosie wrote: »

If Ireland had control over its interest rates, and an open economy, it would not be able to control the value of its currency. The weak currency is what would drive massive inflation, and there is little that the government could do to control that. Countries with open economies cannot control exchange rates and interest rates at the same time.

The impossible trinity that you refer to earlier says that what can't be done is maintaining a deliberately weak currency (like China to encourage exports) while at the same time maintaining high interest rates (to curb inflation) while at the same time allowing free movement of capital. The problem according to the impossible trinity is that if you raise interest in order to curb inflation you also tend to raise the value of the currency.

But note that this is the opposite problem to what you believe is the danger in your post.

The impossible trinity is more of a problem for countries in a strict currency peg as far as I can see. They must control the exchange rate in order to stay in the currency peg. That means they must give up one of the other two. They set the exchange rate but then if they try to control inflation, they give up control over capital flow. Because we're in an analogous situation to a country in a strict currency peg, we're suffering the same problems and we're seeing massive capital outflow.

So I don't think controlling inflation is a problem in a floating currency scenario once have a strong independent central bank.

southsiderosie

SkepticOne wrote: »

The impossible trinity that you refer to earlier says that what can't be done is maintaining a deliberately weak currency (like China to encourage exports) while at the same time maintaining high interest rates (to curb inflation) while at the same time allowing free movement of capital. The problem according to the impossible trinity is that if you raise interest in order to curb inflation you also tend to raise the value of the currency.

But note that this is the opposite problem to what you believe is the danger in your post.

The impossible trinity is more of a problem for countries in a strict currency peg as far as I can see. They must control the exchange rate in order to stay in the currency peg. That means they must give up one of the other two. They set the exchange rate but then if they try to control inflation, they give up control over capital flow. Because we're in an analogous situation to a country in a strict currency peg, we're suffering the same problems and we're seeing massive capital outflow.

So I don't think controlling inflation is a problem in a floating currency scenario once have a strong independent central bank.

But ostensibly the reason for letting the currency float would be to force a devaluation which would theoretically restore Ireland's competitiveness and ease pressure on wages and employment. But a tight monetary policy meant to control inflation seemingly defeats the purpose of a currency devaluation.

At this point I am confused. What do you really expect will happen in Ireland? Because I see no way forward that will not be detrimental to workers, it is just a matter of from what direction they are going to be squeezed.

Again, turning to the Argentina example:

As the expectations of devaluation increase, domestic agents
modify their portfolio by reducing their investment in domestic capital and increasing their foreign asset holdings. This reduces GDP and tax revenues. We assume that once a government devalues, the expectations vanish and the economy recovers its past levels of investment and GDP. A government has an incentive to devalue so as to increase the future levels of output, consumption, and capital stock. However, if a government devalues, in the future it requires a higher fraction of GDP to repay its external debt (which is denominated in US dollars euros). In consequence, the government policy of devaluation faces a trade-off between recovering the economy, and increasing the future cost of repaying the debt.

Our main result shows that under a speculative attack the optimal government policy depends on its level of debt. If the level of debt is low, the government devalues to increase capital but does not default. For higher levels of debt, the government does not devalue and repays its debt because the cost of a default is higher than the benets of a devaluation. Finally, for sufficiently high levels of debt, the government defaults, because repaying the debt is too costly, and devalues, once again to increase capital. Our theory explains why we sometimes observe "good" devaluations, where the economy recovers or "bad" experiences where devaluations took place only after government default, and as a result the economy pays a severe productivity cost that reduces investment and output (as in Argentina in 2002).

I think this highlights the Irish problem in a nutshell.

Homehippo

Hypothetical situation of Ireland leaving the euro

I asked the question today what would happen if Ireland left the Euro or it became an Irish Euro versus a german euro and I was told it would depend on the legislation brought in by the government. If it covered only irish banks you would receive Euro (Dutch) but if it included foreign banks in Ireland it would be Irish (Euro).

If this happened I would expect all debts to become Irish Euro and likewise all Assets you would then transition back to your own currency (print new currency and switch like we did in the Euro).

I think this is a real possibility and would have the effect of a haircut on Irish debt while making us competitive again.

The problem is how to protect your savings is to move it into sterling or buy a german bond. Physically opening a bank account in another euro zone country is much more difficult.

SkepticOne

southsiderosie wrote: »

But ostensibly the reason for letting the currency float would be to force a devaluation which would theoretically restore Ireland's competitiveness and ease pressure on wages and employment. But a tight monetary policy meant to control inflation seemingly defeats the purpose of a currency devaluation.

However in a situation where you might want the currency to fall, in those circumstances (such as we're in now) you are in a deflationary situation. Allowing the currency to fall counteracts that.

At this point I am confused. What do you really expect will happen in Ireland? Because I see no way forward that will not be detrimental to workers, it is just a matter of from what direction they are going to be squeezed.

Like you I don't see anyway forward that will not be detrimental to workers. However I see the situation where the currency remains at a high value but the adjustment is made through deflation as more detrimental since the adjustment made that way will involve redundancies, bankruptcies, evictions and so forth. Wages and prices are not going to come down in any sort of coordinated way.

Again, turning to the Argentina example:

I think this highlights the Irish problem in a nutshell.

I think you may have misinterpreted what you have quoted from that paper. I have reformatted it slightly but otherwise the wording stays the same. What it says is:

Our main result shows that under a speculative attack the optimal government policy depends on its level of debt.

a) If the level of debt is low, the government devalues to increase
capital but does not default.

b) For higher levels of debt, the government does not devalue and repays its debt because the cost of a default is higher than the benets of a devaluation.

c) Finally, for sufficiently high levels of debt, the government defaults, because repaying the debt is too costly, and devalues, once again to increase capital.

So what what the article is saying is that there's an optimal course of action depending on the level of debt. For the middle level of debt the best course of action is to try and pay down the debt without devaluing. For relatively low levels, devaluing is optimal and at the other end of the scale, defaulting and devaluing is optimal.

Now I think the problem with Ireland is that we thought we were in the middle category. What we're finding out is that we're not.

southsiderosie

Homehippo wrote: »

Hypothetical situation of Ireland leaving the euro

I asked the question today what would happen if Ireland left the Euro or it became an Irish Euro versus a german euro and I was told it would depend on the legislation brought in by the government. If it covered only irish banks you would receive Euro (Dutch) but if it included foreign banks in Ireland it would be Irish (Euro).

If this happened I would expect all debts to become Irish Euro and likewise all Assets you would then transition back to your own currency (print new currency and switch like we did in the Euro).

I think this is a real possibility and would have the effect of a haircut on Irish debt while making us competitive again.

The problem is how to protect your savings is to move it into sterling or buy a german bond. Physically opening a bank account in another euro zone country is much more difficult.

The second this was announced there would be a run on the banks and massive capital flight from the country. I would rather put my money under a mattress or wire it to my family in the US than leave it in an Irish bank, if this were to come to pass.

southsiderosie

SkepticOne wrote: »

However in a situation where you might want the currency to fall, in those circumstances (such as we're in now) you are in a deflationary situation. Allowing the currency to fall counteracts that. Like you I don't see anyway forward that will not be detrimental to workers. However I see the situation where the currency remains at a high value but the adjustment is made through deflation as more detrimental since the adjustment made that way will involve redundancies, bankruptcies, evictions and so forth. Wages and prices are not going to come down in any sort of coordinated way.
I think you may have misinterpreted what you have quoted from that paper. I have reformatted it slightly but otherwise the wording stays the same. What it says is:

So what what the article is saying is that there's an optimal course of action depending on the level of debt. For the middle level of debt the best course of action is to try and pay down the debt without devaluing. For relatively low levels, devaluing is optimal and at the other end of the scale, defaulting and devaluing is optimal.

Now I think the problem with Ireland is that we thought we were in the middle category. What we're finding out is that we're not.

Reading that article, I assumed that Ireland was a high debt country, based on the budget projections (which I do not trust, and double in my head whenever I see them). Based on the current trajectory, and the interpretation in the article, it looks like Ireland is heading for a "bad" experience:

where devaluations took place only after government default, and as a result the economy pays a severe productivity cost that reduces investment and output.

SkepticOne

southsiderosie wrote: »

The second this was announced there would be a run on the banks and massive capital flight from the country. I would rather put my money under a mattress or wire it to my family in the US than leave it in an Irish bank, if this were to come to pass.

We are probably going to leave the Euro at some stage however much of the money has already left and is leaving right now not because of this fear but because of bank insolvency.

SkepticOne

southsiderosie wrote: »

Reading that article, I assumed that Ireland was a high debt country, based on the budget projections (which I do not trust, and double in my head whenever I see them). Based on the current trajectory, and the interpretation in the article, it looks like Ireland is heading for a "bad" experience:

Yes we are what ever we do. But the article says that the optimal strategy is default and devalue.