July 16, 2008

If all else fails, then maybe it's time to ditch the euro

Posted in Euro · 66 comments ·
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Is it time to think the unthinkable? With banks shares in free-fall, lending collapsing and bad debts rising by the hour, what can we do? Now that the slowdown has spread well beyond houses and construction — evidenced by falling retail sales, rapidly rising unemployment and faltering tax revenues — is there an option out there, which, although dramatic, might be plausible in the context of the recession the country is facing?

What we are talking about here is pulling out of the euro. It might never happen, but it is worth considering how and why this might come to pass.

Now that the hollow platitudes of the “soft landing” merchants have been exposed as nothing more than cynical sales pitches, while the various paid PR men who rabbitted on about our “fundamentals” were obviously talking through their posteriors, it’s time to replace catchphrases with hard thinking.

Our problem is pretty straightforward. If a Martian economist landed in Ireland, he’d see straight away that Ireland is caught in a currency arrangement which will make our recession much deeper than necessary. This is an economic fact, not a political slogan. The euro is now part of the problem, not part of the solution.

In economic history, no sovereign country has faced a property downturn, inspired by a ridiculous credit binge, resulting in such huge personal debts without devaluing its currency.

Look at what is happening in the UK and the US. Both countries find themselves in the same bind as we do. They thought that they could get rich by buying and selling houses to each other using other people’s money.

Once this ponzi scheme has been revealed, they let their currency fall. This allows them to recharge their exporting sector, making it more competitive and, more significantly, it gives them the opportunity to inflate their debts away.

Ireland, in contrast, is trying to fight its way out of a recession without any macroeconomic policy. This is political suicide.

We find ourselves in the bizarre situation where we can’t reflate our economy either by printing money or by borrowing. This bad dream is a superannuated version of what happens in American states following a boom bust cycle.

Because American states can’t pull out of the dollar when their housing markets go into reverse, they usually experience mass migration as people up and leave. But crucially, the state gets a Federal bailout through more dole coming from the central government in Washington. So economic policy makes things better.

Think about Ireland now. We do not get any dole transfers from the EU. Quite the opposite, we are net contributors to the EU budget. The EU also prevents us from borrowing more than 3pc of our GDP so that we can’t borrow our way out of the downturn — which is what most countries do.

So we are in the counter-intuitive situation whereby our taxes go to pay Romanian farmers, while our Government is cutting spending on our own health service.

Therefore, unlike the US states, our recession will be endured without any macro-economic solutions.

As a result, unemployment will rise to a much higher level and house prices will fall much further than necessary in the next few years.

The example of this folly is Germany, which experienced the first EMU-inspired recession in the late 1990s to the early part of this decade. Germany had its unification boom in the early ’90s, it spent enormous sums of money trying to absorb the East, the economy boomed for a while, wages rose as did property prices and immigration.

Then in the late 1990s, German industry realised it couldn’t compete at these new higher wages and it retrenched. The engine of Europe went into a decade long downturn. Euro interest rates — although low — were not low enough for a faltering Germany and the euro was far too strong for German exporters so they took the recession on the chin.

Unemployment rose to over four million and stayed there for close to a decade. German companies became competitive again by shedding jobs. Now after 10 years of a slump, they are world beaters again, but many ordinary Germans suffered much more than they would have had they had their own currency.

Now let’s see what happening at home. We need a rapid injection of cash to stabilise the economy. But we don’t have the cash, so we are, in effect, reduced to a barter economy where we can’t create money.

Any Leaving Cert economics student will tell you that the reason the 1930s depression in the US was so severe is that the American government stayed with the Gold Standard for too long and didn’t print money to bail out its debtors. Ireland is now facing the same prospect.

The only way Irish people straddled with huge mortgage debts (the legacy of our stupid binge) will be able to pay these off is with a bout of massive inflation. It sounds radical but this is the truth.

Inflation in a debt crisis bails out debtors and penalises lenders — those with savings suffer, those with debts prosper. It’s simply a transfer of income from one section of the society to another. Yes, this is unpalatable but arguably, it’s an obvious way out of our present dilemma.

In recent days, much has been made of the fact that the multinational sector is still strong. Well it would be stronger still if our exchange rate were to fall.

Equally, the reason the Irish banks and the stock market are in free-fall is that investors realise the extent of the problem and there is nothing else to sell in Ireland Inc — no currency, no interest rates swaps, nothing. So they sell what they can — Irish companies.

When an economy is in a nosedive, it is the democratic responsibility of the elected government to do something about it. In bad times, ideas that seem extreme in “normal” times are sometimes entertained.

As our crisis deepens, the “currency” issue is likely to re-emerge as a political option. It is worth remembering that our boom was triggered by a forced devaluation in 1993. At the time, the establishment regarded the 1993 devaluation as a calamity; in the event, it proved to be a godsend.


  1. Malcolm McClure

    David says that it is worth considering how and why we should pull out of the euro. He makes a reasoned case for why we should do this but the critical issue is how? Presumably the contents of our national purse were deposited in the European central bank when we converted from the Punt, and we have been borrowing from that bank ever since. As major debtors to that bank how on earth are we supposed to float a new currency backed only by the fresh Atlantic breeze?

  2. Marcus

    What we are experiencing is a economic leveling from west to east. We had our binge now it’s time for the new member states in the east to catch up with us. It’s going to be tough but the whole point of the EU is prosperity for all states. Why do we find it such a bizarre prospect that Irish people should travel to Poland for work. We need to evaluate our priorities and avoid the mess that the US has got itself into. Greed is our greatest enemy. Knocking 30% of peak house prices and 10% of all public service wages, and increasing tax on the Rich would go a long way towards increasing confidence in the economy. Capital Appreciation created a lot investor genius’s in this country and it’s these same people that cannot now make ends meet. These people need to eat some humble pie, bite the bullet and stop pretending that a 3 bed semi is worth €400,000. Everything is relative. Look at the international property market and see what you can buy for 400K in OZ or NZ.

  3. John Gerrard

    A new isolated Irish currency could not possibly survive. The speculators would have a field day at our expense. This would not be a logical option. Then does David really think we would be better off changing our currency to US Dollars or Sterling?

    I fear that we have backed ourselves into a corner with no room for manover.

  4. walnut

    Not one of your better articles David! A point of note: The UK has a very similar situation to our own. Sterling is a freely traded currency and and yet it is trading above $2. Blaming our participation in the Euro is a red herring. The Euro is not strong, just less weaker than the pitiful dollar. To have monetary independence would expose our little Punt to wild girations on global exchanges and ultimately leave us with much higher interest rates. Also, the Bank of England cut interest rates from 5.75% to 5%; I ask you where 3 month sterling is trading right now?. Give us the discipline (and protection) of Weber and co at the ECB anyday!

  5. Philip

    Is the Euro that strong a currency after all? Really it’s a d.mark in disguise. I think Ireland would not be alone in thinking the unthinkable.

  6. Correct me if I am wrong but is that not essentially stealth pay cuts across the board? The fight to cut pay is too hard, sot he easier option is to make what everyone is paid worth less. So, most people would immediately try to ensure that any savings they had stayed in Euros, so that they are not devalued like the new currency, would we have much in the way of cash in the banks then?

  7. My Lost Generation

    There is very little to say about the state of the Irish economy and finances that has not already been said in the past year.
    Ireland has a small population and could possibly deal with the economic prospects with more flexibility than other bigger countries but then again, is our debt now so heavy that there is very little anybody can do?
    Will we have to sit quietly within the European Union and watch the big guys like France and Germany deal with our future? There is no other alternative.
    Ireland would have gone through a downturn anyway, we just made it harder for ourselves.
    We were FOOLS.

  8. MK

    Hi David,

    You bring up a number of interesting points in your article:

    There are more disadvantages leaving the euro now than staying in it. Its not a case that we have made a bed which we now must lie in, the euro has been and will be good for us. We just need to use other tools that are at our disposal other than setting interest rates and devaluing an Irish punt or “an eireannach krone”. These tools are removed from us so we must use other ones. Other ones may not be so easy to implement of course, nor as painless. Cutting wages in real terms never is, if that is one tool/knob that we must turn.

    Your analogy with a US State is a useful one. One ‘stickiness’ aspect which we have and a US state doesnt is that a large percentage of our population wont move, unlike a US state who’s people can have short term allegiances and who dont have language barriers. Kerry cant move to Lodz, but North Dakota can move to California. Yes, we can ‘export’ our young people, and people will still come here intra-EU. If our economy does go down the swanee, perhaps we will once again become a net recipient of EU funds. There is nothing that prevents this if things get bad enough, its not as if that tap has been turned off forever.

    The point of debts being eroded by inflation: yes, we saw this in the 70′s and will see some of it again. But inflation at 6% or so, if it gets to that, is still relatively low although much higher than the ECB’s target run rate of 2%. Debt servicing costs will increase if interest rates go up. Inflation is not necessarily a bad thing, and could help Ireland re-adjust its cost base, if the cost-base grows at a slower real rate. Its all about relativity in relation to inflation, and real-term, rather than actual raw numbers.

    I disagree with you about Germany and would contend that Germany did not have a boom in the 90′s. Indeed, after unification with East Germany, the new country was held back, as millions of east germans became unemployed (overnight) and then enjoyed west german social payment levels. This was a social cost. Germany maintained its efficiencies though and used and uses its skills/products in engineering and has recovered. But it still has labour market inefficiencies although that is the social landscape there and the cost of doing business with employees based there.

    > Once this ponzi scheme has been revealed, they let their currency fall.

    I dont think either the UK or the US ‘let’ their currencies fall. Currency movements are beyond governments control, but they can influence them by interest rates, etc. The US would prefer a stronger dollar for example. For some years, sterling traded in a tight band with the euro after a fixed rate was hinted at by Blair/Brown along with a process for joining, yet UK’s joining seems to be getting more and more remote and currency traders have seen this ‘stickiness’ evaporate. You are correct about the property bubble being a ponzi scheme.

    Yes, I agree that the Irish punt devaluation in 1993 was one factor which kick started our boom. Making us instantaneously 10% cheaper on global markets overnight, including our ‘valued’ public sector brethern. Nice when we had it but now no longer available. We just have to, like the Germans, grin and bear it.

    You noted the gold standard (which I mentioned about your last article) the US link to it and LC economics. I dont have LC economics! Yes, the gold standard is something that could not be maintained perhaps, but trust in paper money is the key, and with certain participants getting easier access to vast swathes of that printed money, it can skew factors such as work/productivity/etc, where there is too much money/capital chasing a return. As I say to some of my colleagues, unless you have 5 million leveraged and working for you and gaining, you are going backwards in this global money race whether you realise it or not.

    A thought-provoking article David ….

    MK

  9. Philip

    The Euro’s real value is being underpinned by the productive economies in Europe – Germany mostly. The ECB are not keen about printing off too much of it – so interest rates do up.

    “but trust in paper money is the key, and with certain participants getting easier access to vast swathes of that printed money, it can skew factors such as work/productivity/etc, where there is too much money/capital chasing a return.” <- This hits it squarely on the head. The real value of products and services is vastly lower than the amount paper that represents it. Off balance sheet debts, derivatives etc. are all behind this froth. Dollar, Sterling and possibly even the Euro are way overvalued relative to the Yuan etc. These currencies will move as the froth becomes more obvious. But China and India will want them to stay high to allow them suck in scarcer resources for their wealthier populations. If you invent a new currency i.e. a Punt, then you may get short term respite. But your lower costs are irrelevant relative to the high productivity of these new economies. The new Punt would just bring more admin costs and a flight of capital out of the country.

    I agree that our best bet is to control what we can control…Public sector pay (300K people!!!), Bank and Insurance and anything else that hampers productivity. Public capital investment, Training, Sucking in FDI using new innovative incentives etc. needs preservation. Dropping the minimum wage by 1 Euro an hour is a nonsense idea as these guys are on survival wages as it stands and will never really add to the country’s productivity – they need training before that can happen. As an example of how to run a country with a light administration we should look to New Zealand – and they sell apples and butter on the Irish market!!

  10. John

    Our national debt may now be relativly small. But I presume all our banks owe their international creditors large sums denominated in Euro. If we leave the Euro and devalue our newly created currency, how will the banks meet their international obligations? And how will they access new funds in order to lend to businesses and potential house buyers? Seems more likely that the banks won’t even be able to repay their current debts if we leave the Euro, which could have serious affects on their very viability? A scary scenario.

  11. sinead kelly

    The wealthy nations’ of europe are not members of the euro, Norway, Switzerland, Denmark, Channel Islands, Isle of Man, Iceland.Canada does not fix the value of it’s currency to the dollar even though the USA is it’s largest trading partner.Joining the euro while the UK stayed out made as much sense as the gobshites who tried to create a beach in the FSC.Why does everybody claim that public sector employment is 320,000 when the actual figure is 460,000 or 28% of all employees’!.Go figure.

  12. Diarmuid

    Being a member of the Euro is just about the only element of stability in the economy at the moment. While you address some of the positives of having our own currency you ignore many of the negatives:
    will the multinationals be as keen to remain in an Ireland outside of the eurozone when many of our Eastern European rivals are looking to join it?
    what would the price of oil be if it were not for the strong euro counteracting the rise in its dollar price for us – critial for an island economy?
    likewise what rate of food inflation would we have?
    how unstable would our exchange & interest rates be given the havok that international investors are currently playing with our stock market?
    how would the first-time buyers who are already struggling with repayments cope with a doubling of interest rates?
    what would the rate of interest be on our soon to rapidly increase national debt? would there even be any takers for it in the credit crunch?

  13. Dave L

    The housing boom has been financed, as, David, you say yourself “by old diligent Germans’ savings” which would remain on the Banks’ books in euro. As a previous poster said, their viability would be severely threatened. With their backs to the wall in such a severe fashion there only person who will suffer here will be the consumer of banking services – those with or without savings and/or mortgages.

    Furthermore, why penalise those diligent enough to refrain from the spending binge by inflating away their neighbours debt? How would this let-off spawn a change of attitude and a more responsible approach to financial management than the current buy-now-pay-later have it all and more approach rife in this country.

    On the flipside of that coin, why penalise the just-young enough not to have been conned into property by inflating away their savings?

    What would happen to these people ( and this includes educated early 20s – the policymakers of the future of the future )? A surge in immigration from this vital demographic? The same effect as the USA state immigration you mention above?

    What’s suggested in the above article seems to absolve responsiblity from various facets of society in favour of a cheap-shot at the banks at their most vunerable. Their retaliation would affect us all.

    In fact why do we need to soften the depth of the forthcoming recession trough? We could learn so much more from it’s dramatic nature than from some attempt to cover up, sidestep what’s just happend in Ireland.

  14. Malcolm McClure

    Sinead Kelly said “Why does everybody claim that public sector employment is 320,000 when the actual figure is 460,000 or 28% of all employees!”
    Does the 460,000 figure include the 100,000 farmers who have received over 1.6 billion euros in REPs payments since 1994?
    REPs is co-financed 75% by EU and 25% by Irish Exchequer.

  15. Arthur Shirran

    David,

    Is the pressure of having to produce quick articles to deadline affecting the quality of your thinking? You irresponsibly make no mention of the downsides of reverting back to a tiny free floated currency at the mercy of international speculators. If we wanted a one sided opinion piece we can simply turn to the latest from your colleague, Mr Myers.

  16. Ger

    3 quick points re leaving the euro

    1) In your last article you lambasted the central bank for getting us into this mess – and now you want to hand control back over to them to fix it
    2) The UK are not in the euro but funnily enough are in quite a similar looking recession to ours (ditto US)
    3) The entire Iceland economy nearly collapsed recently due to speculation on the currency – always a huge danger for a small economy with a small currency

  17. I think we should keep the euro just leave the eurozone and make ourselves some kinda tax haven
    for rich people of europe. Banks would be happy. More easy credit. More houses, better
    result. Having lived in Germany I think our property in Ireland is undervalued. We are still
    a developing economy. Yes we are an Island but people love coming here. 20% of our population is
    non-irish*, In 20 years we ‘ll probably have closer to 40% non Irish.
    The price of your house is going to go up in value in the future no matter what spin you put on it.
    Its just a matter of time but how long are we willing to wait?

  18. Bill

    I would prefer for our monetary policy to be controlled by the ECB rather than a national institution that can be influenced by local politicians.
    Having a common currency has not led to convergence in the economies of the states in the USA, why should it lead to the same in Europe? We have to work within a European framework that has a goal of greater integration and interdependence in order to foster a sustainable global economy that is not based upon narrow national objectives.
    The solution lies in an Ireland inc. recognizing its mistakes and working as a community within such a framework rather than bolting at the first sign of discomfort.

  19. Andrew Butler

    It is with much sorry I see you have joined with the Rupert Murdock media empire in bashing the euro over the head this morning.

    I always admired the way you spotted the unusual however you never commented on the “Sky News” bombardment effect. You know every courtesy area the length and breath of the country we visit (hospital waiting rooms, doctor surgeries, Car dealers, Airports, etc..), aswell as the “free” coffee there is an LCD TV with Sky News beating out the Murdock propaganda.

    Now we well know the Brits are the most begrudging half-hearted Europeans bar none and were it not for their economic prosperity and Labours unbroken run in power over the last 10 years (Tory infighting, Europe a big issue), England would be back to the Maggie Thatcher diplomatic hostility of the eighties within Europe.

    The current powerful anti-europe player in the UK is Rupert Murdock, at every chance he digs at the bureaucracy of Europe, its undemocratic structures, its corrupt parliamentarians and its militarization. Obvious case in point is the stories where a true brit shopkeeper or market stall owner can not sell in imperial anymore because of these EU bureaucrats; ridiculous stuff but gets the point across to the Sun tabloid public; all frightening the UK general public against Europe in the process. I will not even comment on his media empire and its undemocratic, secretive setup which we pump millions into for premier league soccer…

    We because of our satellite dishes are being exposed to this shrapnel from across the channel. What surprises me is how you have been seduced by this subtle anti-europe sentiment.

    It took us the last 20 years to get out from under the English thumb however because of this anti-europe sentiment where are we running back to: our old enemy. The clamour for Euro exit would be deafening except the UK are in recession aswell and they have control of their fiscal policy; fat lot of good that’s doing them…

    I accept we are a small country however I do not believe in a policy of isolation, we either 1) embrace Europe and prosper or else 2) rejoin the commonwealth or 3) become a 51st US state, either way isolation is not the route to prosperity. We need free access to world markets for our technology, people and food.

    I accept there are flaws in the current EU setup however name a better setup to copy for trade and peace between independent countries, it’s the best in the world, balancing individual countries cultures with a common political and trading system.

    Long live Europe and the success of the Euro for continued peace and prosperity.

  20. Ismail

    Ireland cannot really leave the Eurozone. By now everyone has invested their money in euros, be it classic bank deposits or government and corporate bonds. If the Irish government would start discussion about leaving the euro and bringing back the punt so to devalue the currency then there would automatically be a run on all Irish banks. Everyone would try to take out euros before the conversion into punt and put their money into euro accounts in other countries (presumably Germany as Europe’s largest economy). This would immediately destroy the Irish financial system with even more economic and financial pain on the economy. Bondholders would immediately sell off Irish bonds, stripping companies and banks off their refinancing lines on the financial markets. If Ireland would try to convert these bonds into lower valued punt bonds then this would be the same as defaulting ony our debt – Irish bonds would be no different than bonds from Argentina. Alternatively the Irish government would have to guarantee all euro denominated bonds, meaning that the punt value of the bonds would rise in line with currency devaluation, increasing public debt so much that the government would have little money left for investments in Ireland and increasing interest burden on the state budget. Furthermore a sell of would trigger a rise in rates for bonds so that refinancing for companies, banks and the Irish state would become far more expensive than it is now – a sure way to bankrupt your economy since higher financing costs on the capital markets would destroy any competitive advantage gained from a devalued punt.

  21. b

    @Andrew Butler,

    You seem to have learned your spelling from the A-Team and your economics from Eamon DeValera.

    Rupert Murdoch is the Aussie media mogul and Murdock was the loon in the A-Team.

    The flaws in economic policy you speak of were the willingness of the government to get rid of all their economic controls and throw our economic fortunes to the wind. Try driving a car with no gears or brakes driven by someone else who isn’t in the car. We made the mistake back when we decided to go the Euro route not now. Now is just the result. We should have planned for the ups as well as the downs. This shower of losers that call itself a government never saw the boom coming or going so how do we expect them to grasp the Euro?

    If Sky News bothers you so much and you go to all the waiting rooms in the country to check you can ask the person controlling the TV to turn it off. That should keep you busy and away from economic policy.

    Bring back the macaroon bars and the comely maidens and turn off that British filth.

    Progressive aren’t we.

  22. A Butler

    To nameless b

    Aside from your personal attach and flippant comments on my misspelling of MR Rupert Murdoch what SOLUTIONS are you offering to our current economic difficulties?

    My economics are far from DeValera policy, going back to your car analogy; with no Euro we will have an economic Lada with fine brakes, gears and clutch, except old antiquated technology and useless to us for the 21st century, in an isolated economic backwater, where we have to go to our neighbours (UK) for a tow as required when we break down…back to the old days as you said..

  23. b

    We don’t have any of the control you are saying. We have pretty much nothing apart from a few slapped together estates.

    The oft derided Lada is probably a bad analogy. The Fiat 124 from which it was derived got at least two countries on wheels (Italy and Russia) by getting the basics right from the start. It might look like junk and drive like junk but the economics of the Fiat 124/Lada Riva are faultless.

    What we have done is made a gold plated donkey cart of an economy into what we called a Rolls Royce. If anyone says it isn’t we say that they are a “talker downer”. We never tackled the fundamentals but concentrated on shoveling money into black holes like the HSE and interpretive centres and concentrating on the froth of the economy which is/was houses and cars.

    Competitiveness was thrown out the window as unpatriotic.

    I think that saying we were under the thumb of the British is misunderstanding the situation. We were told that we were but to be honest we closed the doors, threw away the key and pointed the finger. The British pretty much ignored us for most of this time when Dev sent us all to mass. We isolated ourselves. Kim Il DeValera was the architect but we went along with it.

    The solution I would propose is not to vote for the politicians who removed the economic controls again.

  24. Thanks for all the comments as usual they raise more ideas and issues that the articles ever could. Just a note to the comments which suggest that leaving the Euro would not be a good idea. I agree with you, but the article was meant to flag the circumstances that might give rise to a debate about the Euro.

    There are many small countries that operate within the EU, without the Euro. The prospect is not impossible. I believe that we are in for a period of intense global exchange rate instability as countries with large current account surpluses abandon their dollar pegs and float. In such circumstances, the dollar falls like a stone, the Euro rises (inappropriately) and the competitive brace tightens for Ireland. There’s nothing like double digit unemployment to focus the mind.

    Let’s keep entertaining ideas and scenarios, if only to better grope our way to a possible solution to the country’s present dilemma. Thanks again, David

  25. Nagelz

    Heres a question, most posts in here are both articulate and quite honest in their format.

    So….has the downturn affected you and if so how are you dealing with it?

    Theres nothing like ground level application and experience to get a cross section of what it’s really like out there.

    We find ourselves as busy as we have been….and by making some changes twelve months ago we can operate more effectively without running at a loss.

    And we operate in the building sector (again I’m refusing to call it construction sector)..lol

  26. Johnny Dunne

    David, how can we get a debate going about the possibility of exiting the euro (or other ‘action’) to stave off a very long recession in Ireland ? Don’t see our politicians yet with a cohesive voice on economics to debate and address these required changes. There should be a real political debate from all parties to consider thoroughly ideas and suggestions on how the economy could prosper.

    Things have changed quickly again this summer — it’s like someone turned on a ‘switch’ a few weeks ago after the ESRI report and media commentary about the ‘recession’. Businesses I know are cutting out costs and grabbing business where they can.

    Exiting the euro should be at least considered as an option for the Irish economy, especially if the government expects to be able to fund the near €60 billion for public services expenditure from decreasing tax revenues. If not there is a huge risk the country will have to borrow massive amounts for many years to fund current spend levels, not even couting rapidly rising costs ie unemployment etc.

    Could we convert personal private debt to a new ‘punt’ when revalued by the financial markets ? If we had our own currency the ‘mortgage laden’ young entrepreneurs could start living again and focusing on woking productive Irish indigenous companies. How could a growing company export competitively to the UK or US now? What’s worked in the past will not help future competitiveness.

    Many may feel opting out of the Euro and allowing the debt to be revalued to a “new punt” is a non-starter due to a high % of the loans that Irish banks make are not covered by the domestic market. The Government may have to bail out some of the ‘Big 5’ anyhow ?

    In the case of Ireland Inc., low corporation tax for multinationals exporting ‘services’ by transfer pricing with few jobs — that’s all we have left at the moment Unfortunately, not much other good news on the horizon, most of the large MNCs don’t care about an Irish currency (except for local costs) as they are booking vast revenues in dollars (~99% outside Ireland). Exiting the euro may sound crazy but all options should be debated thoroughly by those politicians, economists, civil servants, business people – whoever can make a change ?

  27. Eric Dig

    its time to roll up our sleves and do honest work for a realistic wage , it will set us free.

  28. Colin

    i think we can solve our problems internally, without having to exit the euro. here’s how

    1. end the rip off culture – electricians/blocklayers/plumbers/plasterers/barbers/hairdressers etc.. will have to swallow huge pay cuts. their wages were simply unsustainable.
    2. do not reward people who bought houses for more than they could afford. encourage our youngsters to get on property market by letting it bottom out as quickly as possible.
    3. try to reward careers in engineering/science/technology. its the german model of success.
    4. cut back on the sauce and give up the fags.
    5. arrange car pooling to get to work, buy bicycles for the kids to get to school.
    6. buy quality irish products, not the foreign stuff you see in foreign supermarkets

  29. B

    @Colin.

    I agree/disagree.

    I think the best thing we can do is pay off our debts. Credit card, holiday loan, personal loan, overdraft. The lot.

    Then we can;
    1. end the rip off culture – electricians/blocklayers/plumbers/plasterers/barbers/hairdressers etc.. will have to swallow huge pay cuts. their wages were simply unsustainable.

    These clowns are in the bubble part of the economy. The recession will put manners on them without help. Their wares are not our business. The price of their services can be shaped by demand. Irish people in general were not fussy and threw money at services without any heed for value for money.

    2. do not reward people who bought houses for more than they could afford. encourage our youngsters to get on property market by letting it bottom out as quickly as possible.

    Your home is not an asset. Has nobody learned from this at all. Another bubble will have the same result. If people bought houses for more than they can afford they will have to just wear the cost. I agree any bail out for mortgage holders by the rest of us is not fair. They have free will and were not forced to buy.

    3. try to reward careers in engineering/science/technology. its the german model of success.

    There is no bling from hard work. People are too soft.

    4. cut back on the sauce and give up the fags.

    Agreed.

    5. arrange car pooling to get to work, buy bicycles for the kids to get to school.

    The car poolers will run the kids over. And parents will stop the kids cycling over stranger danger rumours. Put them on the bus.

    6. buy quality irish products, not the foreign stuff you see in foreign supermarkets.

    1. Show me the quality Irish products. 2. By a foreign supermarket you mean Lidl and Aldi. Tesco is foreign. I am sorry but I am not going to get ripped off by Dunnes and Superquinn. I will stick to Aldi. A lot of Irish people work for and supply these stores.

  30. David

    call this extreme if you will but Ireland is sounding more like a heavily indebted country with an overvalued exchange rate and entering what may be a long recession. Investors are flying out the door and the banks are teetering on the brink.
    Another country experienced a similar crisis in 2001…….

  31. [...] while we’re talking business, let’s flush whatever sense and economic relationship we have with Europe down the toilet. Oh, [...]

  32. Philip

    To all you Anti-EURO types :)

    In the end, the only thing you can trade are skills and productivity (or your ability to execute cost effectively). Costs of operating in Ireland are high for small companies and the infrastructure is still business damagingly underdeveloped (even for MNCs). None of this has anything to do with the Euro. You major market is in Europe – Not US or China etc.

    If we converted to the Punt, I think it would alter the cost base relative to other countries in the short term, but, the cost of living would soar. Fuel, Services etc as seen by the “Punt”ers would rocket. Cost of telecoms, Computers etc would soar. Remember, we have to buy/import this stuff and we are tiny with no bargaining power. But “Punt”ers would become very cheap to employ relative to the international scene – but I fear skillsets would never be allowed to develop beyond low level tasks simply because we have too small a local domestic market and we have stalled our infrastructural development cos we cannot afford that either. The transition would be very painful and dead ending.

    If we stick with the Euro, you peg the costs of Fuel and Food more easily for now and we focus on getting up the value chain as a country. You need parity level access to European Skills in Germany, UK, France etc. – ditch the Euro and you loose that access and any ability to develop yourself. Hard work and increased productivity without pocketing profits is the only way out.

    Be Hi-Tech Hi Productivity and Frugality – or be Lo Tech and Isolated with a few rich gits and ignorant. That’s the choice for the short to medium term.

  33. Garry

    I think theres a flaw in the core of this article, blaming the euro for germanys recession. Germanys leaders did something unusual (to us)….. They led…. After the fall of the Berlin Wall they said screw the beancounters, we’ll reunite the country. They knew full well it would cost a lot of money and hurt their economy and probably take decades but they also knew there would never be a good time to sort it out. So they swallowed hard and went for it. Almost 20 years later theres still a lot of work left to do in the old east germany, but the have made sacrifices and will succeed.

    Compare that to the endless search for the “quick fix” from our leaders and commentators here

  34. MK

    David wrote:
    > Just a note to the comments which suggest that leaving the Euro would not be a good idea. I agree with you

    Okay, glad we got that sorted out! :-)

    > the article was meant to flag the circumstances that might give rise to a debate about the Euro.
    > There are many small countries that operate within the EU, without the Euro. The prospect is not impossible.

    I agree that the euro is a “project” which at some point we could leave. However, there would need to be many more cracks in the project. At the moment the euro has too many advantages for us to leave. Yes, there are a few countries in the EU that do operate without the euro but there are none that have joined it and then left. I dont think we should be the guinea-pigs for such a step. As mentioned, the euro is not the sole cause of our ‘ills’. Leaving it is not a solution, at least for now.

    > I believe that we are in for a period of intense global exchange rate instability as countries with large current account surpluses abandon their dollar pegs and float. In such circumstances, the dollar falls like a stone, the Euro rises (inappropriately) and the competitive brace tightens for Ireland. There’s nothing like double digit unemployment to focus the mind.

    The exchange rate instability is already underway with the USD in ‘freefall’ since well over 5 years. But currencies are floating and their price is based on international markets and the supply and demand of the currency. Like many things traded, the prices they are sold at may not be deemed to be ‘fair’ or ‘equitable’, but it is an open market. Of course there are some economists that wonder whether there should be floating currencies at all. Why should the work that a person does yesterday be of more value or less value than what they do today. Yes, many analysts are saying that currencies could depeg from the USD and move more reserves to euro. That will likely make the euro stronger. The Swiss though have never complained about having a strong CHF, so should we with a strong euro? We just need to get on with it as currencies will adjust whether we like it or not, unless we peg.

    One interesting scenario is a pegged USD with the EUR with the central banks of each allowed to set their own interest rates. The UK could also peg as well. It would make trading between the blocks easier and remove one aspect of instability. Perhaps the growing usage of yuan and rupee and ruble could form another ‘pegged block’ although there would be more difficulties politically in that grouping perhaps.

    MK

  35. Ed

    B and Philip are right – let the economy find its own level and up skill the workforce. It would be nonsense to award people for foolhardy behaviour by papering over the cracks created by them. As I said on a previous post , I ignored the property binge, against pressure from wife and family and invested in R&D. Our output is going up as Germany recovers and the new accession states become more prosperous – we’re on a roll. Why should I and my staff be punished by the state in an attempt to bail out its stupid profligate friends – lessons have to be learnt.

  36. Malcolm McClure

    MK said ‘ The UK could also peg as well. It would make trading between the blocks easier and remove one aspect of instability.”
    Pegged currencies are hopeless cases. Most people can still remember the ERM and Black Wednesday.
    World trade depends on borrowing sinking dollars, proceeds of which are converted into stronger local currency for required transaction, then repayments made after the dollar has sunk further. If the dollar starts rising, world trade slows down and producer countries experience inflation. Most exported dollars find their way back to the States again as investments in Florida real estate, Chrysler Building etc. in mistaken belief that investments are safer there.
    Therefore it is unlikely that the dollar will “fall like a stone”.

  37. dave villa

    For all intents and purposes the Island of Ireland pop(6 million) is just another region of Britain pop(60 million).Why not rejoin the UK?.Same shops , TV stations, Newspapers, football clubs etc.Dublin and Belfast could have teams in the premiership!.The structure of euro economies such as France and Germany are completely different to ours as we are finding to our cost.Our best bet for the future is to increase trade with the Fare East, Commonwealth etc.The euro suited Austria and Belgium because they are so heavily dependent on Germany for their exports.Ireland was and is completely different.

  38. Ah , Great Idea David why don’t we leave the Euro currency and bring out our own paper money , why not call it The Guinness punt ?,. .. as you must have had one two many in Dalkey while you quickly typed this article .
    The Reality is now coming home to us here with a bang , ‘The Celtic Tiger’ was just a nice PR catch phrase as we took land off farmers and the inner circle of bankers gave out buckets of cash to the Developers to build housing estates , while at the same time they didn’t bother with basic infrastructure, or a community structure and why should they bother as Mr Banker was letting every Paddy buy a new shiny BMW to drive out of town to the supermarkets.Where papered yummy mummies left the young ones into play in ‘the play zones!’.
    We have an elected bunch of idiots running the country and we deserve them , how can we actually believe that a house with 3 of 4 bedrooms no matter where it is located be worth €400,000.00 ,or are they behind the closed doors all MTV cribs with marble floors , gold ceilings and platinum tap sets ?
    Truth is our own greed and closing our eyes to the reality has landed us now in this situation, not just the cost of a barrel of oil and the American dream of capitalism. We have been over paying our selves for a decade now and the bubble had to burst, when anyone questions what we pay our politicians, their answer is ‘they would get these wages in the private sector’ . So therefore their salaries are justifiable and we like the stereo typical drunk of Europe , just accept this.
    We have to take a step back and start to look at the bigger picture and maybe as you wrote before start looking at the Irish who left these shores to see will they ‘Buy back into the motherland’ as we have to do something. I have in the last few months befriended a lovely sweet educated girl from china , who sells revolving chairs and office furniture she gets 2 days off a month stays in accommodation provided by her employer and takes home €75 a month , she also gives out about foreigners where she lives in Gunadong south east China along with 88 million others, how can we compete with this in a global market place.
    We have to start to look to the East and forget about the American Dream land , we have enough houses and apartments lying empty now so we should look at other industries , maybe get back to farming and selling our Irish dairy products to the Chinese who are developing at an extortionate rate , invite them over here give them houses and the tax incentives we give to America firms. They could teach us a few things.We don’t need to keep filling our cars with petrol when there is out there engines now developed to run on water ( well Hydrogen actually the H in H2O ) . We can have street lights running on mini wind turbines and solar panels and we should look again at our entertainment industry and leisure markets.
    But we need to wake up pretty fast , the Banks in the good times make millions from us and when as now things go down , we bail them out this too has to stop.
    We were clever enough a decade ago to get help from our well off European Neighbors to give us cash to build our infrastructure ( a lot of which we wasted too paying politicians family members consultancy fees ) .
    Close down our tribunals and switch off our sky boxes and start writing to our ex pats to , buy a Irish gift box for their host neighbors.
    If we don’t wake up soon and start smelling our imported coffees we will be in a far worse state than we were ever in back in the eighties. And with Michael O Leary grounded his planes this winter , we will be back on the old Famine ships again.!

  39. Eugene

    “Correct me if I am wrong but is that [ currency devaluation] not essentially stealth pay cuts across the board? ”

    For everybody – Public Sector, Private Sector, savers and the rich, So fairer.

    Most of the people who are supporting the Euro forget that we would not be in this mess were we not in it – the bad old currency speculators would have forced up interest rates in 2001 and the recent boom would not have come to pass.

  40. No way, and that from someone who knows very little about currency. (why not close the market till things get better) Today’s news: Investors in Karachi demanded a temporary halt to trading.
    When this was denied, some went on the rampage, smashing windows and lights until they were dispersed by police.
    The punt wouldn’t be worth shit.
    The price of a house can be what you deem its worth; skies the limit. It only becomes a problem when the law allows (fools sell it) to those who can’t back up their loan with not only good prospects, but a guarantor who can and will be held accountable. That’s the answer simple as (primary school logic) that. I know you know that David as do mot of us. The banks and the property developers have colluded to create a false economy at the cost of the Irish nation. There has been crime committed, and it’s time to round up the usual suspects and punish only the real perpetrators. The FBI are in the process; just how far it will go to get real justice I wont hold my breath but it’s a start.
    You don’t mind a lad making a few bucks but bringing down an economy is stretching a nod and a wink a wink too far.

  41. Stephen Kenny

    Cyrano, what an old fashioned person you are! Closing the markets, per se, would of course be very wrong as it would bring the market into disrepute, and damage people’s trust in it. But, in far off days (before the 80s and computers) when the market got a bit ‘unsettled’, key groups of people would be told to take a “good lunch”. The effect would be to slow down the whole system.
    Real justice after all this property nonsense? Don’t hold your breath. The problem is that other than a few fringe players, the chances are that no one has actually done anything illegal. Now it’s over, we can all look back and say “ha! they created a false economy and we’ve all been ripped of”, but if you look deeper, you’ll find that no one really decided anything much. It was all little, low level, decisions, mixed up with pressure to lend from potential borrowers, and equally little, low level, decisions by competitors.
    As an example, the problem that the authorities had with Enron, after their famous soft landing, was that they couldn’t find any good, juicy, crimes, and they certainly looked! I can’t remember what Ken Lay, Andy Fastow, Jeff Skilling and co were finally done for, but it was generally pretty minor stuff.
    Just think back 3 or 4 years, sitting in pub, listening to the interminably tiresome, hyper-ventilating, accounts of property prices. Everyone remembers them. And the “Properties are worth what someone is prepared to pay” and “it’s just supply and demand” arguments. Well, the bankers, in their little groups, had exactly the same problem: Branch manager A, over-bright eyed, condescendingly buys the round in the pub after the regional meeting, to celebrate his branch’s quarterly results. Branch Managers B, C, D, and E look glum, remembering the friendly pat on the shoulder, and the advice to “get those numbers up”. They each probably had a mortgage sufficient to buy a reasonable chunk of southern Nebraska, and a covey of beady-eyed deputies salivating at the merest sign weakness. So, the next time a ludicrously over ambitious 18 year old property genius came into their office with a plan to buy up some unseemly large part of East Prussia, with a business plan that was an eensy-weensy 40% outside guidelines, well, we all know what they did.
    The lesson, time and time again, is that it doesn’t need crooks for this to happen. The problem is the nature of the system, it’s regulation, and so forth. Any arrests will no doubt be high profile, and an excuse to say “Look, it was all this guys fault, so no need to change the rules”. In this case, the rules are the problem. Assuredly, certainly, most definitely, it’s the rules.

  42. RB

    Just as an interesting , but unrelated addition to the state of the Irish economy . My 25 year old sister was just recently approved for a 2 bed room apartment beside the Dart station in Bray, Co Wicklow. The original asking price last year was 380,000 euro, but it didn’t sell. They accepted her offer of 290, 000 euro last week. So that’s a 90,000 drop in a year… Does anyone think there will be further falls in property prices? Was my sister ripped off or did she net herself a bargain? Personally, I’m not sure..

  43. Karl Kraut

    David McWilliams: “Any Leaving Cert economics student will tell you that the reason the 1930s depression in the US was so severe is that the American government stayed with the Gold Standard for too long and didn’t print money to bail out its debtors.”

    You mean that people are still being teached that nonsense?! It was the FED’s credit binge, engineering those fabulous Roaring Twenties, until its inevitable collapse in 1929. And that gold standard was already a myth back then, replaced by central banksterism. For the real history you’ll have to read Murray Rothbard’s ‘America’s Great Depression’.

    David McWilliams: “The only way Irish people straddled with huge mortgage debts (the legacy of our stupid binge) will be able to pay these off is with a bout of massive inflation. It sounds radical but this is the truth.
    Inflation in a debt crisis bails out debtors and penalises lenders – those with savings suffer, those with debts prosper. It’s simply a transfer of income from one section of the society to another.”

    Yeah, have the Irish government exchanging the Euro for a new paper currency, so it can rob the people that did not speculate on ever rising property prices but conscientiously saved money for the future–sounds like encouraging criminal actions to me, that “simply a transfer of income from one section of the society to another”. Un-be-lie-va-ble!

    But then, just few more years and we’ll go back to gold and silver anyway, finally ending this boom-bust, welfare-warfare papermoney experiment, this vivisectionlike experiment on human beings.

  44. Ah Your sister probably went to Oxygen , and enjoyed the Green turn this year too !, If she was prepared to commute from Wexford town she would have picked up a bigger 2 bed roomed pad for a whopping €180.000.00 . and have less junkies and city heads to worry about, but who would expect her to travel on our old trains that distance ! . Sure with inflation her Train Ticket may eat up another 100 grand this next year!

  45. MK

    Hi Malcom,

    MK> The UK could also peg as well. It would make trading between the blocks easier and remove one aspect of instability

    Malcolm McClure> Pegged currencies are hopeless cases. Most people can still remember the ERM and Black Wednesday.

    Well, I agree that pegged currencies are usually a sign of weakness from the “lessor”-currency to the target currency, for example Peru, Bolivia and other south american countries that are pegged to the USD. However, it provides stability IF that currency is a globally traded one and if that currency is in the main the one with which a particular country (or indeed region) trades in. Of course the pegged currency becomes interchangeable and used. There is usually an official rate and black market or indeed market rates that may be slightly different. Its all down to confidence at the end of the day in the paper, whether you trust 1 USD or 3 Bolivars or Peso’s or whatever it is.

    The ERM was not a strict pegging per se but was a ‘loose’ aspirational club and was open to the full set of market forces, hence its failure in a few particular cases (UKP, IEP, DKK?). The euro, which is essentially a pegging along with central banking as well, is tight and is working! Floating currencies can give you as a country more control, but there is nothing wrong with pegging currencies if well managed. A pegging of the Euro and USD would be a major step. If you think about it, if the euro can be spread over 15 countries, then why cant there be a global currency in principle? (there used to be one – gold!).

    Malcolm McClure> World trade depends on borrowing sinking dollars, proceeds of which are converted into stronger local currency for required transaction, then repayments made after the dollar has sunk further. If the dollar starts rising, world trade slows down and producer countries experience inflation. Most exported dollars find their way back to the States again as investments in Florida real estate, Chrysler Building etc. in mistaken belief that investments are safer there. Therefore it is unlikely that the dollar will “fall like a stone”.

    Well, current world trade depends upon a large number of things that include the US Government borrowing on terms of 2 years, 5 years, 10 years and 30 years. Its not a case of supply countries borrowing USD, they are loaning USD to the US to buy the products they are selling. If the dollar rises it gives the US more purchasing power and I would contend the opposite that in fact world tade would speed up (in volume) as they can buy more. I agree that the dollar wont fall like a stone, but I think Davd McW meant that in relative terms. The USD is falling like a stone in water over the last 5+ years against the basket of other currencies (not only euro). That cant go on indefinitely but its certainly scaring those governments that have pegged their currencies to the greenback and who are holding reserves in USD as well.

    MK

  46. Stephen Kenny

    What I remember most vividly about the inflation in the UK in the 70s was my dad – who volunteered with a charity for the elderly – telling me that one of the things that they kept an eye on, was dog food sales. When I said “What, people get more pets in a recession?” he said, “No, dog food sales to people who don’t own dogs”.
    Inflation is a terrible thing since it hurts those most vulnerable, and sadly I think David is right, it’s the easy political option since it involves no ‘cuts’.

  47. b

    @Stephen Kenny.

    Dog food has to be fit for human consumption in Ireland so it is an economic indicator OK but not in itself dangerous. I personally wouldn’t eat it but people eat dairy products with vitamin E from pigskin and calves stomachs in cheese and God only knows what goes into sausages. Everything bar the brain and spinal cord.

    We will eat anything. The main difference is how it is marketed.

    We will also buy houses the same way. We are sold the sexy dream but get offal. Sausages are sold with Billie Holiday music as accessories to surfing when in reality it is seasoned pig guts.

    Let the buyer beware and stay away from sausages if you want to live.

  48. SpinstaSista

    b

    Sausages have always been made from pigs guts. Back in the mists of time people used to make a party out of killing a pig and carving it up. If the children were lucky they got to blow up the pigs bladder and play football with it.

    Rennet (derived from calves stomachs) is used as a starter in the production of cheese. Don’t think that going vegan will get you away from all this gruesomeness, especially if you go organic. The fertiliser that is spread on organic vegetables is none other than ordure, or dung!

    As for dog food, God forbid that anybody should have to eat it but some of it compares favourably with what’s passes as sandwich fillings at convenience stores delis.

  49. Malcolm McClure

    I worked in a pegged currency regime and what happened was the (semi-officially approved) rise of a black market for dollar cash and cheques. Trying to do business in such a place becomes extremely messy.

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