Leaving the €uro: Pros & Cons?

southsiderosie

SkepticOne wrote: »

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

It is the optimal strategy once the country is under speculative attack. Thus far the ECB has been willing to intervene in order to stave off the attacks, and it thinks that the waters would be further calmed by Ireland accepting a banking restructuring plan, which the government has steadfastly refused to do.

Ireland does not have to be the target of speculation, but it most certainly will be if there is any hint that it is leaving the eurozone. This more than anything else will force a default followed by devaluation. The worst case scenario does not have to happen, and the only reason it hasn't so far is because of the ECB. But talk of devaluation will turn into a self-fulfilling prophecy.

Edit side note: When the Argentina situation happened, I was working on project focusing on Latin American trade issues, and their rapid economic collapse was appalling. I have a hard time seeing this as "optimal" for any country, even if it may seem like the best option from where Ireland is at today. So I guess that shades my perspective here: from what I saw and read, Ireland should beg, borrow, or steal whatever the Germans want them to, if it means they can avoid ending up like Argentina.

BeeDI

I want to ask a question regarding farming and Ireland being forced out of the euro.
I own a herd of beef cows, and typically sell the offspring each autumn. The stock are generally for export to France and Italy, with some I guess going to the UK. There are many thousands of farmers in the same situation.
In the event of Ireland leaving the euro and adopting say the punt at a predetermined value. Lets say €0.75.

My questions.

1. Is it reasonale to assume that the value of my sales would remain pretty much at pre devaluation levels.

2. If the value of my stock for export sale has remained stable despite the ciurrency devaluation, does it follow that increasing the size of my herd of cows is a good hedge against the prospect of currency devaluation.

Cow I understand. Gold I don't. So I'm thinking, for me cows could be my store of value.

Thanks

SkepticOne

BeeDI wrote: »

I want to ask a question regarding farming and Ireland being forced out of the euro.
I own a herd of beef cows, and typically sell the offspring each autumn. The stock are generally for export to France and Italy, with some I guess going to the UK. There are many thousands of farmers in the same situation.
In the event of Ireland leaving the euro and adopting say the punt at a predetermined value. Lets say €0.75.

My questions.

1. Is it reasonale to assume that the value of my sales would remain pretty much at pre devaluation levels.

2. If the value of my stock for export sale has remained stable despite the ciurrency devaluation, does it follow that increasing the size of my herd of cows is a good hedge against the prospect of currency devaluation.

Cow I understand. Gold I don't. So I'm thinking, for me cows could be my store of value.

Thanks

I think the answer to 1 would be yes. Why would a buyer in France or Britain pay you less just because you use a particular currency? But isn't the single farm payment the main source of income for farmers?

I think in general you should invest in exporting businesses generally.

K-9

The big con for me is that 90% of our exports are by Foreign owned Companies. That isn't ideal, but there is no point ignoring reality either.

To me, it seems counter productive leaving a single currency zone that is our biggest trading partner and one we haven't developed properly:

Ireland exiting the euro and the risk of setting the Irish economy on fire

A measure of how much an economy is dependent on external trade is provided by the ratio of exports to an economy's annual GDP.
In 1973, when Ireland joined the then European Economic Community, its export ratio was 21.4 per cent. By 1993, it was 51.1 per cent; 79 per cent in 1999 - the year of the euro's launch - - and it is forecast to be 93 per cent this year.
By contrast, a comparable developed country, New Zealand, had an export ratio of 11.3 per cent in 1973 and 22.9 per cent in 2008.
However, New Zealand is the home of the world's biggest dairy products company, Fonterra, which is responsible for about 25 per cent of its total export earnings and over one third of international dairy trade - - selling in 140 countries and providing direct employment for over 10,000 in New Zealand.
Foreign-owned companies, mainly American, have been responsible for Ireland's exports boom in recent decades. Irish-owned firms account for only about 10 per cent of Ireland’s annual exports.
In 1973, 55 per cent of total Irish exports went to the UK and the percentage is almost 20 per cent today. However, more than 50 per cent of current exports from Irish-owned firms - - mainly producers of food and drink - - are to the UK market. The countries Germany, France, Benelux, Italy and Spain collectively represent a GDP 3.9 times the size of the UK, yet the non-food exports by Enterprise Ireland clients companies to these countries, is 40 per cent of that of the UK. Exports by Irish-owned firms to China in 2007, were 6.7 per cent of total exports from Ireland to China.

About 18 per cent of Irish merchandise exports and 15 per cent of service exports are to the US but Ireland is used as a significant profit centre by US firms because of the low corporate tax rate and patents can be parked in Ireland to receive tax-free income from other overseas locations. US firms transact a significant amount of their business in the world's second reserve currency - - the euro. Hedging against a small volatile currency is not likely to be in their interest.

While a secession would not prompt an ECB gunboat on the Liffey, there would likely be an economic collapse, at least initially.

Fieldstein and Hague were correct about exiting as once fear spread of an impending exit, funds would be moved offshore.

The end of the ECB lifeline for the banks, would surely bring them down.

Inflation would rise and then at some stage when an equilibrium value for the new punt was reached, mortgage borrowers would have to contend with maybe double-digit interest rates, while savers would be forced to convert their euros to lower value punts.

The business sector would be in turmoil as losses would have to be booked on euro debt and the governance system that is challenged with the smallest crisis, would have to put in place a siege economy.

Meanwhile, a country that is so dependent on foreign investment, would have a choice of a surge in its national debt or default. Against that backdrop, it would need a lot more than an IDA Ireland syrupy marketing campaign, to restore Ireland's reputation.

Costs would initially be lower, in the main trading currencies, but in the absence of reform, they would creep back up over time as high inflation would erode the advantage.

So why risk massive turmoil instead of creating a competitive economy within the huge Eurozone market?

In the year to August 2009, 42 per cent of merchandise exports from Ireland went to the Eurozone. In 2008, 37 per cent of service exports went to the common currency area. It could be bigger and why would it be rational to hoist the white flag when the market area will grow in size over the next decade?

To me, embracing it far more, makes more sense than leaving it.