Is the end of the Euro really nigh? If so is it REALLY good for Ireland?

RachaelVO

I was reading David McWilliams article this morning, and I was intrigued to get the sane/insane opinions from AH (don't ask me why, but there are a few who do speak a bit of sense;) )

Here's the article (don't whinge to me about the length of it, I didn't write it)

http://www.davidmcwilliams.ie/2011/11/14/the-end-of-the-euro-is-nigh?utm_source=WebsiteSubscribers&utm_campaign=4ef03c711b-Weekly_Roundup_10_August_2011&utm_medium=email

One of the great American popular economists of the last century was Herbert Stein who combined journalism, policy work; he flirted with academia and dabbled in all sorts of private ventures. He also held the prestigious position of Chairman of the Council of Economic Advisors in the US during the 1970s. His greatest contribution to economic was the simple rule “when things can’t go on forever, they stop’.
Thinking of the endless crises within the Euro whether it is Greece, Italy, Belgium, Ireland or Spain, whether it is bank debt, household debt or sovereign debt, whether it is Germany’s taxpayers of France’s banking system – Stein’s law comes to mind. This can’t go on forever, so it will stop one way or another.
Increasingly, as events overtake and eclipse all previous “bailout”/”rescues”, it is becoming evident that the option of the two-speed euro is now on the cards. Ireland will be firmly in the “softer” euro camp.

No one has mentioned this specifically yet, but it is likely because Europe has always had a core/periphery dimension. In times of crisis, such as the last financial crisis the 1993 currency crisis, the European elite’s instinct is to save the core and deal with the periphery in as expedient a manner as possible.
Faced now with a meltdown of their system, Europe’s elites need a solution that snatches a political victory from the teeth of financial defeat.

Apocalypse – in the guise of a country being ejected from the euro – is not a political option because the risk of everything falling apart are simply too high. In addition, a two-speed euro, with a hard euro for the core and a soft euro for the countries in trouble, relieves the pressure on the whole European financial system.

Arguably, for the average citizen such a deal is preferable to the choice we face now. That choice is either a complete, chaotic break up of the system with huge negative implications for savers; or ten years of austerity with huge negative implications for borrowers.

A two-speed euro – involving two distinct but related currencies – keeps the entire euro project together and gives the EU donkey the carrot of moving forward and the stick of promised economic reform. It is important to understand the perpetual forward motion idea lies at the heart of the EU. As long as the project seems to be moving forward slowly towards the nirvana of more integration when the time is right, “Europe” is progressing.

A break up of the Euro means the project has stalled and this is unacceptable to the people who make the rules in the EU. They are believers; and like any ideologues, these true believers are driven by the utopian notion that the future is always brighter than the present. Incidentally, heaven is based on the same premise.

This weekend we are at a tipping point and it has been a long time coming. Don’t be suckered into the spin that this crisis came out of the blue or was unforeseen. It has been brewing
For many years now this column has pointed out that the Euro could/would breakup, presenting Ireland with a big dilemma. At the time it was pretty radical even to question the economic legitimacy of Euro. It was unfashionable to suggest that the currency might be dogged with internal inconsistencies centered on inter-country trade and capital imbalances, national idiosyncrasies and profound economic differences. More radical still was to follow this logic by predicting that the system would implode.
As is typical in Ireland, the dissenter is dismissed as a crank or worse an enemy.
But after all the insults we are where we are, the euro in its present form is doomed. So lets look at what is likely to replace it.

Consider what the two-speed Europe might look like.

The first thing we know is that the peripheral countries can’t keep up with Germany. Take Ireland as an example. When we had the Punt linked to the Deutsche Mark we devalued six times in thirteen years just to try to keep up competitively with the Germans. Conversely, when we joined the Euro and could not devalue, we lost 30% competitiveness against Germany. It could not be clearer.

For the other peripheral countries the situation is worse.

So we all need a change in the value of the currencies we trade in to make our companies more competitive and thus, more likely to export. In tandem, we need to make imports more expensive so we don’t buy too many of them. The weaker exchange rate achieves this. Devaluations work. And to any one who doubts this, just point to the lasting competitive gains garnered by Finland and Sweden after their 1992 devaluations.
Without currency change, we can’t keep up with the Germans and this makes the EU’s promise of economic convergence hard to achieve without huge borrowing. Up till now, we borrowed to achieve a lifestyle and a level of economic activity. Now none of us can pay this money back.

So we need debt forgiveness or some debt deal. Accompanying the new euro would be mass debt write downs because if you reduce the value of the currency that the people get paid in but you don’t commensurately reduce the value of their outstanding debts, the people will simply not be able to pay and the country will default after the devaluation. This would not be clever. Everything must be done together.

So let’s think about the new euro. The new soft euro would trade at 70% of the old one (my figure plucked out of the air). This would mean that relative to Germans, our standard of living would be cut by one third overnight. We would achieve in one night what the present policy seeks to do in five years.
We would be extremely attractive place to investment in because our labour would be much cheaper. But don’t forget that this reduces our income by the same amount.

All our debts would be reduced by 30% because they would be in a new currency. Obviously, the banks that lent in hard euros and would now get paid in soft euros would carry a huge exchange rate loss. This would need to be dealt with. Possibly, the banks in each country could issue bonds backed by the EU and redeemable for new euros at the ECB. These bonds could be considered capital so that the banks didn’t go bust.

What about the savers who lost out on their stock of old euro saving which would be devalued by 30% when converted into the new euro? They could be given new inflation-linked euro bonds issued by the State and redeemable from the ECB but not straight away. There would be an incentive to keep them in the banks as savings. This is normal because if you think about it, most people don’t touch their savings. The State would have to make sure that the new bonds were credible enough so that people wouldn’t want to cash them straight away.

There is no easy way out of this mess. There is no way we can wave a magic wand and promise that no one will be affected, but it is clear that the euro is on its way out and will at best, mutate into something else.
The two-speed euro idea, at least prevents the chaos of a messy implosion and the rushed reintroduction of many currencies. It achieves the competitive devaluation, which for us with the majority of our trade and investment coming from and going to, America and Britain, it would give us a shot in the arm. The debt forgiveness element would also give the heavily indebted commuter generation – the Pope’s Children – a break.

There is never a best way to do things in a crisis, simply a least bad way. Maybe this is it.

One thing we do know for sure is that “when things can’t go on forever, they stop”.

Now I'm not expert but what he says makes a whole lot of sense to me, but is there summit missing from his explanation?

kippy

Its not good for Ireland.

RachaelVO

kippy wrote: »

Its not good for Ireland.

Why though?

McWilliams makes it sound like it could be a good thing, so why is it not good for the country?

MagicMarker

McWilliams is a tosser.

Biggins

I would like to see Ireland out of it but but sadly we have gone too far into it, that to try getting out now, would only produce greater damage to the Irish state for some time.
We don't need that at least for the moment or for years to come, compounding and adding to our current problems.

Maybe in a couple of decades when/if we get back on our feet, reappraisal might take place but for the moment, I cannot see anything good out of jumping from the Euro.

At present its a case of "Better the devil you know..."

cosmicfart

On the one hand it will be good but on the other hand it will be bad. I wud rahter we became the 51st state or maybe even invade the north, the Faroe Islands and beyond as Id love if lapland was part of Ireland

RachaelVO

Biggins wrote: »

I would like to see Ireland out of it but but sadly we have gone too far into it, that to try getting out now, would only produce greater damage to the Irish state for some time.
We don't need that at least for the moment or for years to come, compounding and adding to our current problems.

Maybe in a couple of decades when/if we get back on our feet, reappraisal might take place but for the moment, I cannot see anything good out of jumping from the Euro.

At present its a case of "Better the devil you know..."

What happens though, when they divide the euro to the "hard euro" and the "soft euro" (for Ireland, Spain, Italy, Greece, Portugal and Belgium). We won't have that much of a choice... How much damage/good will it do then?

Galtee

Is the gist of the article not to introduce a two speed euro, a strong and a weak Euro? Anyways, it's funny, I don't believe dropping the Euro will help us. The UK and US both have their own currency and their both up the creek also 3 years on so if it was such a brilliant idea they'd be home and hosed by now.

ejmaztec

The banks would like us to leave the Euro, so that they can get back to robbing us with dodgy exchange rates and commission when we go on trips to former Euro-zone countries. Thieving fuckers!

ilovesleep

We've been put on a course of austerity to save a failing banking system. I really cannot see any amount of austerity fixing irelands debt problems, europes debt problems, the debt problems in the USA and it's only a matter of time before the whole house of cards come down on the cnut of the system that is the fractual reserve banking.

It will be disasterous when it happens no doubt, but over time with debt free money I think we will get better.

Wertz

ejmaztec wrote: »

The banks would like us to leave the Euro, so that they can get back to robbing us with dodgy exchange rates and commission when we go on trips to former Euro-zone countries. Thieving fuckers!

Dream on with that one banks... if it goes the way of punt nua/soft euro/chocolate coins, the only people leaving the country will be doing so permanently. The days of holidays abroad will be gone for the masses for quite some time. Besides they're already robbing us... in fact they're already sunning themselves in the bahamas, in metaphorical terms.

I love to see all thes people saying yeah, f*ck the germans lets leave the euro and our debts behind..., bang go our energy imports ( at least to an inaffordable level) bang go you or your families savings (at least 30-50% of them), bang goes that new car you were thinking about next january... but your debt (if you have any) remains in old money and is now 30-50% higher than what it was...

That's before you get into the negative wider effects beyond these shores and this continent...

It might be good for Ireland at some point in the medium term future...but the transition and the intervening years would be disastorous...it's out of the sauna and into the smelter.

CardBordWindow

Can we not just start from zero?

Galtee

CardBordWindow wrote: »

Can we not just start from zero?

Do I get to keep my house? If so then bring it on.

foxyboxer

We hear this over and over. "The markets must be appeased"
This kind of attitude and knee jerk reaction resulted in the Sept 2008 bank bailout.

FFS, didn't the NYSE close for days after Sept 11.

Establish a 2 week moratorium on market trading with prices frozen for the duration and sort this crap out once and for all.

starbelgrade

It's only money.

Someone will sort it out & we'll all be grand.

CardBordWindow

Galtee wrote: »

Do I get to keep my house? If so then bring it on.

No. You must live in the wilderness with everyone else. It'll be fun!

giant_midget

kippy wrote: »

Its not good for Ireland.

Excellent imput there...I enjoyed reading your well thought out post with specific points to why it's bad...thanks for the insight.

Yakult

starbelgrade wrote: »

It's only money.

Last time I check, the world doesn't revolve around the sun, instead a massive hot dollar sign.

starlit

It is possible. Don't think having the Euro is working in our favour in this economic recession, we been better off with either the sterling or our punt back! Look at all the bail outs!?

My name is URL

The Euro is doomed and has been since its very inception. How they envisaged a single currency could work without fiscal unity within the EU is beyond me. Whether or not it'll be good for Ireland is moot imo, we're in a bad situation no matter what happens. Personally, I'd like to see the Euro shelved until the problems in individual nations are sorted out, and until the EU gets back on track to what it is supposed to be. The Euro right now is damaging the EU.

foxyboxer

Irish Times yesterday. A Q&A about personal finances with an Italian Chef.

Headline read.

"WE ITALIANS
ARE SAVERS
BY NATURE"


:rolleyes:

Chucky the tree

we need to make imports more expensive so we don’t buy too many of them

I love the way he is relexaed about it. Not sure he realises just how much stuff we import.

Wertz

My name is URL wrote: »

The Euro is doomed and has been since its very inception. How they envisaged a single currency could work without fiscal unity within the EU is beyond me. Whether or not it'll be good for Ireland is moot imo, we're in a bad situation no matter what happens. Personally, I'd like to see the Euro shelved until the problems in individual nations are sorted out, and until the EU gets back on track to what it is supposed to be. The Euro right now is damaging the EU.

It might be rambling off to the CT end of the scale to consider that perhaps the whole crisis is the German's way of enforcing fiscal union (and thus political dominance through economic means).

A core/hard euro would be damaging to Germany in the short term... they might be pissed at giving everyone else in the union bundles of cash, but the weakness introduced by the likes of ourselves, makes Germany's exports affordable to both the EU and the wider would.

ilovesleep

My name is URL wrote: »

The Euro is doomed and has been since its very inception. How they envisaged a single currency could work without fiscal unity within the EU is beyond me. Whether or not it'll be good for Ireland is moot imo, we're in a bad situation no matter what happens. Personally, I'd like to see the Euro shelved until the problems in individual nations are sorted out, and until the EU gets back on track to what it is supposed to be. The Euro right now is damaging the EU.

The US dollar is also doomed and they are very much fiscally integrated.

seamus

No matter what, it's a market gamble.

This is the way I see it;

Imagine you've got 1,000 people on a large boat. The boat is leaking and taking on water, but it's not gushing. The captain has set sail for port, but had no idea if the boat will make it there before the water consumes it.

There are enough lifeboats to take everyone, but half of the lifeboats are slightly deflated and leaking, the other half are strong and sturdy. Someone proposes that you tie all of the bad lifeboats together in the hope that they will provide additional bouyancy to eachother, giving enough time to get back to port.
The problem is that if just one or two of the bad lifeboats become completely submerged, they will drag any others down with them and the entire raft is lost. This is why nobody wants to tie the good rafts to the bad ones.

Or they might be better off taking their chances on the ship - at least it will sink as a unit and not be dragged down by weaker boats.


That's how I view this "two-speed" euro scenario. It might work, if all of the weaker countries were in a similar space economically. But they're not. We could end up being tied into a single currency where we are the strongest country, and we're being dragged down by consistent fiscal mismanagement in Greece and Italy. What then? Do we break Greece and Italy away and create a three-speed euro?

It may be more prudent to allow for countries to suspend their membership of the euro until they get their houses back in order. Let the strong countries carry on with the euro. The likes of Ireland and Greece go back to our original currency at the rate we bought into the Euro, and the currency is then unlinked from the euro and set free. Then do whatever the hell we like. If we sink, we sink. Once we get our fiscal policy and finances back within strict EU guidelines, we can ask to rejoin the Euro, and we pay a new conversion rate based on where we are.

The main problem isn't so much that the success of the euro would require strict EU fiscal unity, but that requirements were continually stretched at the beginning to get as many countries as possible to support this new currency. At the time, financial markets (and banks) were relatively much more stable, so colouring outside the lines and "promising" improvements in finances were enough to gain entry to the euro.
The requirements need to be repegged against strict measures, and no-one gets in until they meet them.

Now that the euro has a strong presence on global markets, it doesn't need the backing of all 17 members to ensure that it's a strong contender. In fact, if some of those 17 aren't dropped fairly soon, it will lose serious ground in its contention as a major world currency.

From an Irish POV, a return to the Punt could tumble us straight back to the 80's. Mortgage rates in the teens, imports which are 50% more expensive than they are now (and we import most things). We'd be back to meals consisting of spuds, peas and something.
The main difference would be exports and FDI. The cost of doing business with Ireland would plummett, but we would retain our ability to trade without borders to the UK and EU. So there's a potential for massive infux of jobs and foreign cash, but at the cost of massive medium-term pain.

kippy

giant_midget wrote: »

Excellent imput there...I enjoyed reading your well thought out post with specific points to why it's bad...thanks for the insight.

This is AH.
Well thought out posts with specific points are completely wasted in this forum.

ejmaztec

Given that "yer wan" is a popular expression here, we should go one step further and adopt the Chinese "Yuan". It was made for us, and we might as well get in there quick, because that's what every other country's going to end up using anyway.

CreepingDeath

If there was a two-tier Euro, would there be a two-tier ECB interest rate to keep both in check independently ?

Would see suddenly see higher ECB interest rates to keep inflation in check in the lower/slower tier ?

positron

Sorry if this sounds like tinfoil hat stuff, but wouldn't Euro crashing help US Dollar? (as they will remain the dominant safe currency for another 200 years perhaps). And the monopoly of trading oil in Petrol etc will remain intact as well.

So, if the above is right, it is in US's interest that Euro fail. So may be they have a share in orchestrating all this? And the franco-germans was looking for, and now have, a perfect storm to put in place their 'Federal Europe' agenda - for instance, I am sure Ireland can't afford to No to a referendum on that issue if one was proposed.

Hmmm, a bit far fetched... right?

sensibleken

RachaelVO wrote: »

What happens though, when they divide the euro to the "hard euro" and the "soft euro" (for Ireland, Spain, Italy, Greece, Portugal and Belgium). We won't have that much of a choice... How much damage/good will it do then?

The main question is are both speeds going to be controlled from the ECB, in which case the soft euro will have no control over devaluation or will it effectively be two different 'control towers'.

The thing about the soft euro is that all the countries in it will be the ones who have not been able to balance their books, including ireland.

hatrickpatrick

I still hold out hope that the entire worldwide financial system will collapse altogether and banking as we currently know it can be completely eradicated, never to be used again.

Debt based money circulation is a cancer on society.

Chucky the tree

hatrickpatrick wrote: »

I still hold out hope that the entire worldwide financial system will collapse altogether and banking as we currently know it can be completely eradicated, never to be used again.

Debt based money circulation is a cancer on society.

Well I'm sure most people who have money in their bank accoutn don't want this to happen.

seamus

positron wrote: »

Sorry if this sounds like tinfoil hat stuff, but wouldn't Euro crashing help US Dollar?

Possibly. The main issue there is the EU as a block is the second largest importer of US goods, after Canada. If the value of the Euro was to collapse, the US would see a huge drop in exports as the cost of US goods went up in Europe.

The other issue is US exposure to European banks. I know it's big, but I don't know the scale. I've heard it mentioned if european banks fail, the US will enter another depression.

The only actual winner from a euro collapse is likely to be China.

amacachi

positron wrote: »

Sorry if this sounds like tinfoil hat stuff, but wouldn't Euro crashing help US Dollar? (as they will remain the dominant safe currency for another 200 years perhaps). And the monopoly of trading oil in Petrol etc will remain intact as well.

So, if the above is right, it is in US's interest that Euro fail. So may be they have a share in orchestrating all this? And the franco-germans was looking for, and now have, a perfect storm to put in place their 'Federal Europe' agenda - for instance, I am sure Ireland can't afford to No to a referendum on that issue if one was proposed.

Hmmm, a bit far fetched... right?

You cynic. All I'll say is that it suited the US when Goldmann Sachs went and helped Greece cook the books.

hatrickpatrick

Chucky the tree wrote: »

Well I'm sure most people who have money in their bank accoutn don't want this to happen.

None of that money actually exists. It's all a loan from a central bank, owed back with interest which also doesn't exist. The only way to create it, is to take out another loan - with interest.

It's a perpetual debt mountain, which occasionally leads to collosal f*ck ups like we've just had in the worldwide banking system. The sooner that system is replaced with something which actually works, the better.

positron

seamus wrote: »

...........
The only actual winner from a euro collapse is likely to be China.

But if the euro succeeds, the biggest loser would be US Dollar - once they lose their 'safe bet' status', all the deficit related doomsday prophecies involving USD might just come true to some degree. I mean one theory suggests that they fought Iraq war because Saddam was threatening to trade oil in Euro, and possibly set a precedence that others could one day follow. So with that in mind, and putting on the tinfoil had, I think there are bigger players in action here than a simple case of imprudent financial policies and realignment of wealth.

Galtee

hatrickpatrick wrote: »

None of that money actually exists. It's all a loan from a central bank, owed back with interest which also doesn't exist. The only way to create it, is to take out another loan - with interest.

It's a perpetual debt mountain, which occasionally leads to collosal f*ck ups like we've just had in the worldwide banking system. The sooner that system is replaced with something which actually works, the better.

Let me guess, replace the current monetary system with a resource based system?

Amirani

At present it seems prohibitively expensive for any country to leave the Euro, no matter how big the economy. Bond yields for even the likes of Germany would go through the roof if they were to leave on their own.

http://www.cnbc.com/id/44405106/Leaving_Euro_Would_Cost_Each_German_%E2%82%AC8_000_UBS

Crazy Horse 6

Most ordinary smucks have no idea how bad a state the country is in hense you see most of the money left in bank accounts are average Joe and Jane types. The real money is long gone. We are fcked.

mickydoomsux

Meh. Don't believe everything you read in the misery-porn newpapers.

The EU is in bad shape at the moment but it's all just part of the cycle of rise and fall in the economy. It has happened before in the past and will happen again and every time it does the doomsayers will come out of the woodwork to tell us all how we'll be living like Mad Max in a years time.

atila

The euro exchange rate doesnt suggest anything like the end of the Euro.

McWilliams writes very dramatically with an entertaining blend of conspiracy, shadowy motives, dramatic, time running out, suspense building storylines loosely based on reality.

As a commentator he's worth a read but for me his real talent lies in making some very dull news appear more exciting to the average newspaper reader then it really is.

whitesands

Here's Eddie Hobbs saying it's going to collapse

http://www.youtube.com/watch?v=kzGJWtYnAdE

amacca

hatrickpatrick wrote: »

None of that money actually exists.

doesn't some of that money represent peoples hard work and saving over their lifetime...

what it represents certainly exists.....................to wipe out savers for being prudent and trying to provide for their future in one of the safest ways they know how seems just a teeny bit unfair to me

jacksie66

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