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.
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?
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… Read more »
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.
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… Read more »
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.
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?
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… Read more »
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,… Read more »
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… Read more »
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.
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.
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… Read more »
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… Read more »
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.
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.
sub
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
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… Read more »
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… Read more »
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… Read more »
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… Read more »
@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… Read more »
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..
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… Read more »
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… Read more »
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
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… Read more »
its time to roll up our sleves and do honest work for a realistic wage , it will set us free.
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,… Read more »
@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… Read more »
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…….
[…] while we’re talking business, let’s flush whatever sense and economic relationship we have with Europe down the toilet. Oh, […]
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… Read more »
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… Read more »
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… Read more »
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… Read more »
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… Read more »
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.
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… Read more »
“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.
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… Read more »
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… Read more »
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..
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:… Read more »
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!
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… Read more »
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’.
@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… Read more »
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,… Read more »
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.