Leaving the Euro

For Greece (or any other fiscally-challenged member) to ‘leave the Euro’ involves the launch of a new curreny. From scratch. People talk as if the drachma lives on, cryogenically preserved in some icy Limbo for Currencies.

So the Greek government could thaw it out overnight, at some devalued exchange rate, and Bob’s your Uncle. This is moonshine. The Eurozone is not a fixed-exchange rate system, it’s a common currency area. The drachma has been abolished. This parrot is deceased.

Launching a new currency is a formidable undertaking in calm circumstances. In current Greek circumstances, and abstracting from the enormous logistic challenges, it is not do-able. There would be little point launching a new currency unless people could be induced to hold it. The prospectus would have to mention the debt ratio at 113% of GDP and rising, weak competitiveness, the largest adverse sovereign spread in  the EZ and so forth. Who could be compelled to hold this currency even briefly (while it is being devalued) apart from domestic Greek recipients of pay and social transfers? Does anyone believe that the Euro would disappear from Greek trade and payments? Existing debts would have to be honoured in Euro – there is nothing else at present. Not even lawyers could hold that contracts were to be enforced in a currency which did not exist at the time the contracts were entered into.

There are 16 countries in the Eurozone, but 17 European countries use the Euro, the 17th. being Montenegro, which decided, at independence in 2002, not to launch a new currency. They use the Euro, do not get any of the seignorage as far as I know, but don’t have to spend half their lives in Frankfurt at ECB meetings, which sounds like a reasonable deal. (Memo to Montenegro: You may not have a currency to worry about, but you do have banks. Watch it!).

Who can say that Greece, having ‘left the Euro’, would not become a bit like Montenegro, with admittedly an unloved drachma for government internal transactions but most of the economy dollarised (or Eurinated)? Lufthansa reduces capacity a little on Athens-Frankfurt business class, but what else changes?

David McWilliams has advocated in his SBP column that Ireland should choose to ‘leave the Euro’. Please explain, in great detail (this is not a transition-year project) precisely

– how the introduction of a new currency in current circumstances would be executed, and

– how it would pan out in macro-policy terms.

German and other advocates of an expulsion option might join David in this exercise.

89 thoughts on “Leaving the Euro”

  1. @Colm McCarthy

    D.McWilliams has his ‘loose-cannon’ moments – commercial punting is profitable in certain meedja these days – the more provocative the better as facts don’t really matter – the polished spin is what really counts.

    Perhaps he has eventually managed to tie-down the sinecure he craves with an envious green passionate compulsion – advisor to a Minister – Minister Ryan perhaps as the alternate to The Minister?

    Minor point: I’ll give you a break on the NPRF. Shur it’ll be gone by April Fool’s Day anyway. Must SAVE ANGLO, according to Minister Ryan, or WE’LL HAVE TO LEAVE THE EURO! McWilliams and Ryan, fools that love their folly, apparently …

  2. @ Colm McC,

    I have a better idea altogether. I attended a talk recently by Declan Murphy of the Ecology Foundation in Dublin. What struck me most about Declan’s talk was it only talked about Ireland and its transition to a green-er, more sustainable future. Bear in mind something else. Seamus Garvey, who works in a university in the UK, observed that Germany and Denmark had won the race to capture most of the business in on-shore wind energy.

    The fact is, you take the PIIGS nations at the moment. Spain, Italy, Portugal, Greece and Ireland. Many of those countries have huge, huge experience in off shore technology as it is. What we don’t need in Ireland is 1,000 Eddie O’Connors as suggested by the Ecology Foundation. What we need, is a joint operation between all of the PIIGS nations to drive the green economy within the EU. I became aware myself during the Celtic Tiger building boom, the level of talent at PHd level (very young persons also) who came to Ireland and introduced practically rocket science into the construction industry in Ireland. What is to stop these countries accelerating their programs for a sustainable future, through clever cooperation? I mean, instead of Ireland waiting around for the next 20 years or so to develop a prototype wavebob with a miserable possibility of a couple of million funding from Sustainable Energy Ireland every year, why not fast forward that project to drive the real economy?

    As someone in the United States said recently, someone very experienced in carrying out very large projects. Instead of waiting 10 years to finish projects in the US, under existing contracts. Why not re-negotiate and finish the same in 2 to 3 years, by putting multiple contractors to work simultaneously. This would also get us around the bug bear that is the public works ‘value for money’ contract system in Ireland – which contrary to the aim of giving work to professionals, is actually driving them away to countries like Brazil and Abu Dhabi. But the Green party seems to be too light weight on the economic side of the equation, to turn these kinds of tricks into a reality. It seems to me, we are in a Europe for better or for worse, at the moment. But we are unable to change our thinking to realise what benefits and logic that might imply. That is more apparent in the green and sustainable movements than anywhere else, in my view. BOH.

  3. I mean, instead of Ireland waiting around for the next 20 years or so to develop a prototype wavebob with a miserable possibility of a couple of million funding from Sustainable Energy Ireland every year, why not fast forward that project to drive the real economy?

    What I mean Colm, is that the Green party in particular, has no plan or no firm foundation in execution of projects, to enable it to see the bigger picture. This is different to running bicycle hire companies. This requires us to tap into the high level talent available (all young people with expensively funded fourth level education) across all of the economies in dire straits on the pheriphery of the EU zone. Off shore wind in Ireland, wave and tidal in Iberia and solar in the south Med. I mean, what is so hard about that plan, apart from the fact it involves cooperation across borders? We have companies in Ireland, already operating with the ‘ones and zeros’, IBM smart planet etc. We even have a spanish building contractor already building a new terminal 2 at Dublin airport at the cost of billions, being managed by DAA. I mean, how long does it take for politicians to joint together dots? I fear, we could be waiting for the little Greens for the next two decades to do same. BOH.

  4. Celebrity economics has the luxury of not having to deal with the mechanics of a changeover during a panic with the option later, of blaming the process for the disaster rather than the proposal.

    1. It’s said Bertie Ahern’s devaluation was followed by an export boom- true but laughable to suggest a 10% change was more important than the Intels, Dells and HPs coming on stream

    2. We could achieve instant competitiveness – – for how long?

    Celebrity economics also tends to present alluring remedies without pain.

    So the issue of overdue structural reform without which any benefit from devaluation would soon be fritted away, is ignored.

    Iceland and Argentina are often cited.

    Ólafur Ragnar Grímsson, the president of Iceland, remarked last January that the Irish people might be interested in how the devaluation of Iceland’s currency has made the export sector “much more profitable in a matter of weeks.”

    The fishing sector is responsible for more than 50% of Iceland’s goods exports while in Ireland, US-owned pharmaceutical and medical device firms have such a role and the import content is high. Iceland also has its geo-thermal natural resource.

    Besides, about 90% of Irish goods and services exports are made by foreign-owned firms and the majority of the trade is intra-company.

    A country like Argentina could benefit from a devaluation as most of its trade is in commodities – – minerals, grain and beef  – – selling at world prices – – it is now trying to get back into international debt markets.
    How devaluation, higher imports costs; a possible wage spiral triggered by higher mortgage rates and an inevitable period of economic dislocation, would help the likes of Intel is an unknown.

    3. Pub stool economists may be surprised: the Eurozone is Ireland’s biggest market and it has been largely unexploited by indigenous Irish firms.

    4. George Provopoulos governor of the Bank of Greece, wrote in the FT in Jan: “During the 1980s, Greece had another twin-deficit problem (large and unsustainable fiscal and external imbalances) and its own national currency, the drachma. It waved the magic wand twice, with large devaluations of the drachma in 1983 and in 1985, but in the absence of long-lasting structural adjustment and sustained fiscal contraction. The devaluations were followed by higher wage growth and inflation, with no sustained improvement in competitiveness. Speculative attacks against the drachma were avoided only because of strict controls on capital flows, an option that is no longer feasible or desirable. The twin-deficit problem remained. So much for the magic wand of currency devaluation.”

    Finally, to expect the Irish authorities to competently handle the imposition of a siege economy; the move of companies such as CRH from Ireland; the exit of IFSC companies; public clamour for euro funds and a lawyers’ donnybrook in the Four Courts, is risible.

    @ Brian O’Hanlon

    Brian,

    Your ramblings on the Green Party, offshore technology etc shouldn’t be on this thread!

  5. Greece has three options:

    1) Cutbacks – we see what protests this is causing

    2) Welsh – long term consequences

    3) Debauch the currency (ie leave the Euro).

    Leaving the Euro would cause such social chaos that democracy in Greece would be threatened. The short term consequences would be worse than 1) and long term consequences probably worse than 2).

  6. @ Michael Hennigan,

    The problem I have with many of the threads here at the Irish Economy blog, is that they are designed to persuade citizens to slit their throats through sheer dispair and lack of hope. There is an overwhelming weight of negativity and doom presented in many writings here at IE. Somehow, Ireland as a country has to get out of that. Otherwise what is the point. If you want to understanding some of the real economic underpinnings for my ‘ramblings’ as you describe them, check out the podcast linked from Stephen Kinsella’s blog entry here:

    http://www.stephenkinsella.net/2010/03/25/fantastic-podcast-on-trade/

    Then try to apply that to the Greek situation. We shouldn’t be handing over €20+ billions to the Greek economy, and then simply expecting them to ‘work it out on their own’ as good little Greeks. What France/Germany needs to really do, and they aren’t doing from a grander European perspective, is to assess the collosal human resources that are available (and being wasted wholesale) as we speak, in all of the fiscally distressed EU member states. This is what Russell Roberts was talking about in the podcast that Kinsella links to. My biggest fear of all, is that Germany and Denmark having won the race to capitalise on the technology of on-shore wind, do not see it in their capacity to help the peripheral states of the EU to develop a parallel industry of their own, based on trading of services between the PIIGS. Capitalising on their various strengths and specialisations in the manner Adam Smith would have been proud of. All we see is Germany running up a huge trading surplus between it and other EU member states. If there is no good in staying in the Eurozone, why bother? BOH.

  7. @Rory O’Farrell
    Despite the protests, the opinion polls suggest popular (as in more than 50%) support for the measures the government is taking. It appears that in Greece there is widespread distaste for crony capitalism, tax cheating, and public jobsmakework schemes.

  8. @ MH,

    3. Pub stool economists may be surprised: the Eurozone is Ireland’s biggest market and it has been largely unexploited by indigenous Irish firms.

    Forget about ‘Ireland’ this and ‘Ireland’ that MH. That is no good to us. Ireland, and I don’t need to point it out to you, has a working population of only 2.0 million people at best. Within that working population, there is nowhere near enough electrical engineers and other capabilities we need to create any kind of industry. I repeat, there is no good in ourselves thinking of ourselves as an island anymore. It is much better to think of ourselves as a network with the other PIIGS. Likewise, what I said above about the ecology foundation’s business plan. BOH.

  9. I am not a ‘fan’ of doing this and not a spokesman for David McWilliams but the government could begin a departure from the euro by beginning to pay civil servants and some other bills partly or wholly in vouchers. The holders of the IOUs would then either use them to make purchases, or convert them into euros by selling them at less Than face value. The vouchers would essentially be government debt and their value would depend on the perceived strength of the economy, just like a currency. The vouchers could potentially be devalued.

    The main administration required would be to set up separate bank and financial accounts to hold the vouchers. Changes to government payroll systems would also be required but it is not infeasible at all.

    The ultimate effect of this would be (it would be hoped) to reduce the cost of government services in the economy.

    Michael: As I understand it, the reason Argentina needed to unlink and devalue had nothing much to do with exports. It had to do with the lack of a way to fund the development of internal trade. This is a completely different situation from Ireland where growth comes from exports.

  10. @ Antoin,

    That is a good observation about internal trading in Argentina. But rather than use the black/white view of imports/exports – I think that to bootstrap the new green-er economic growth amongst PIIGS, we should look at ways to stimulate some form of internal trade between the fiscally challenged countries. I would extend your concept of vouchers, to make it work between all of the PIIGS nations. As a way to bootstrap economic growth in some way. Believe me, we have plenty to trade. Italy for instance has oceans and oceans of fourth level graduates, a resource which is mostly going untapped. I witnessed that during the construction boom here in Ireland, where I was a project manager having to arrange a lot of diverse human resources from all over the EU zone. BOH.

  11. as do the vatican city, leichenstein, andorra and san marino.
    This Colm, leaving the euro, is an idee fixee with McW. He knows it cant happen but cant help advocating that it should

  12. I think the euro option is one that maybe DmCW sees as being decided now but executed in a gradual and planned manner. We already left a currency union with the UK.

    It is undoubtedly not going to be a fix-all or anything like it, but it surely gives us some fighting chance if it can be executed.

    Germany is explicitly seeking to convert the euro into an ERM, what with it seeking a new treaty with a specific opt-out option. It would surely be easier for everyone involved if Germany just left.

    http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7467198/Angela-Merkel-defies-IMF-and-France-as-anger-rises-over-export-surplus.html

    Rodney Thom’s analysis of the last Irish devaluation and the idea of an optimal currency area have been proved right. but how do we get from here to there?

    I suspect the break-up will come about gradually. Isn’t German policy just so unsuitable (politically) for everyone else in the union, including even France?

    It’s federalism or nothing.

  13. I suspect that when it comes down to it, it won’t be for Ireland to decide, we’ll be lucky if we get to decide our own fate!

  14. @ Antoin o lachtnain

    The 1:1 decade long peg to the US dollar had initially helped restrain inflation but fiscal policy was let rip.

    Inflation was back over 70% in 2001 and a plunge in the Brazilian currency had led to sharp drops in export revenues over a 3-year period.

    @ BO’H

    It’s easy to conjure up the potential for trade from the comfort of an armchair.

    We saw recently how the Innovation Taskforce ignored the market/demand side.

    In the UK, more than 50% of the output of IT firms goes to the public sector. In a period of restraint, a fall in that market, cannot be made up elsewhere.

    As for wind energy, Siemens should be neither forced or over-subsidised to set-up where it doesn’t currently wish to be in the EU.

    @ Ciaran Daly

    Ambrose Evans-Pritchard of the Telegraph is aching to see a break-up of the EU.

    Prof. Axel Weber, the Bundesbank president, acknowledged last week that in future Germany will rely less on exports.

    “In an external environment characterized by a less steep but hopefully healthier expansion, German enterprises will naturally have to focus more on the domestic market than before.”

    At the same time, Weber warned against “actively propping up domestic demand, for example via encouraging higher negotiated wages.”

    Of the 16 members of the Eurozone, it is only the minority of countries that were monumentally mismanaged during the global credit boom, which are now facing serious challenges.

  15. We really need our economics systems at national and federal levels in the EU to start working for us, rather than the other way around.

    The question that Colm McCarthy puts forward is really an unfair question. If you look at Greece together with a movement towards renewed growth opportunities in green technology, developed in cooperation with sister nations in the EU – then a detachment from the Euro become imminently feasible. It may not make sense for one EU state such as Greece to develop its own currency on its own. But in cooperation with a few others, who are all working to build their economies towards a common purpose, why not? Colm McCarthy did not include this option in his original post, and that is what makes the discussion quite pointless as far as I am concerned. But I guess, economists like to partake in meaningless discussion?

    BOH.

  16. Ciaran Daly: We did not ‘…leave a currency union with the UK’.

    We never had a currency union with the UK, we had a fixed no-margins parity, maintained unilaterally by the Irish authorities. If you confuse a fixed exchange rate regime with a currency union, you are in exalted company, but it’s still a misunderstanding, with consequences.

    Try this: go into a darkened room, with no windows, and think hard: what is the difference between a fixed exchange rate regime and a currency union?

    Tommy Tighe: you are right about Kosovo, thanks. Is it a state yet (I mean, recognised by UEFA)?

    More generally, all this chat about expulsion from the Euro, or countries voluntarily leaving the Euro, needs to address the issues raised in the extensive dollarisation literature, amongst many other mere practical matters. Policy has to deal with prospective real-world consequences.

  17. @ MH,

    Siemens doesn’t have to do anything. We don’t need to adopt the 3-blade Danish wind turbine design, or anything else that Siemens developed 20 years ago and we are now using onshore in Ireland. It is possible to re-invent technology to go offshore and develop something entirely different than the 3-blade Danish design. There are a whole raft of reasons why Siemen’s technology is unsuitable for offshore, and anyhow, I would much rather depend on the Italian naval engineering than that of Germany.

    On the Innovation Taskforce report, it falls into the same mistake as all of the innovation reports published recently. They all speak of Ireland as some isolated island take no account of the fact, we have access to huge resources of human capital all across the EU, fiscally challenged or otherwise. BOH.

  18. @BO’H
    I don’t mean to be rude but reading your posts on this topic I regularly find myself thinking I must have missed a previous post to which you’re referring?? I appreciate that green energy appears to be your big interest but surely the posts should be kept REASONABLY on topic?

  19. @ Jack,

    You know what, you are right. All of the above text is too long, too over bearing and too far off topic to sit properly here on this thread. It should have stayed in my own personal blog. The green energy thing is not my interest at all actually. The point I was hoping to make clear, if I could, is that green energy should actually be Colm McCarthy’s interest and everyone elses’ here. I am not too taken by the concept at all.

    Okay, that doesn’t make things clear does it? The explanation I wrote got far too long, but you are welcome to read through it, in my blog entry Green jobs if it grabs your fancy. Best of luck. BOH.

    http://designcomment.blogspot.com/2010/03/green-jobs.html

  20. Colm. Thank you. The comments I’ve heard about various countries leaving the Euro over the past few months have made me wonder if there are any sane economists left.

    Change is hard. And even after it happens there are still people who resist it. The Euro is here and it took years to create and deploy. If some folks think a replacement would be better then they should make real and substantial cases for that and for how it will happen.

  21. @Colm – there may be some in Germany daft enough to think one can just leave a currency union (I doubt there are that many), but what has been raised by the German finance minister is a roadmap towards a country leaving the Euro in an ordered manner, which obviously would take some time.

    As I have written on this blog before, leaving the Euro (if it could be done by magic wand) would solve the Greek problem. There is the issue of dollarisation and the fact that increased competitiveness is not much good if you only have olives and holidays to sell. Of course the German finance minister was probaly not thinking about Greece’s problems when he came up with his suggestion!

  22. @ Colm

    i’m on record for quite a while now as saying that DMcW’s “out-of-Euro” argument has seriously damaged his reputation as a serious economic commentator. He also created a mini frenzy and dangerous storyline at a time when the nation was in danger of losing foreign investor trust entirely. The bizarre breaches of trust and disrespect shown to certain people in his recent book only adds to this feeling that he’s more interested in headlines than content. He’s long since departed to the celebrity-populist wing of economic commentary.

  23. Economics is not a true science Colm MCarthy. It’s very much a social science at best.

    Your smug assuredness of your knowledge of the ‘facts’ is highly entertaining. Would that you had slightly less intelligence and knowledge (if indeed you have) and slightly more personal leadership and then perhaps you could have stood up like david McWilliams and cried in foul in 2001, 2002, 2003, 2004, 2005, 2006 2007? But you didn’t, did you?

    You can hide behind statistics and “I told you so’s” and appear prescient but the facts are, you weren’t. You weren’t prescient then and you aren’t prescient now. All your theory is good for is the lecture hall. it does NOT belong in government strategy (sorry tactics).

    Like the little dog who barks because he knows his pack leader is standing ovr him, protecting him, you yap away with all the glory of a feisty jack russell. Let’s check back on your prescience and applied knowledge (an economist can’t get any closer to the levers of power than you have, can they? Not in Oireland anyway) and see how mighty an economic intellect you are.

    Time will tell Colm. Time will tell

  24. @Eoin bond
    What do you think of Eamonn Ryans views that not saving anglo means we have to leave the euro? Equally as daft as DmcW’s “we must leave the euro” arguments?

  25. @ Brian

    it was a bizarre quote. That said, if we defaulted on a large amount of debt owned by French and German pension funds, well it would make relations with our EU comrades, eh, challenging, in my view…as i’ve said before, a lot of people in Euroipe view our banking problems as quasi-sovereign in terms of responsibility…

  26. @Eoin
    “if we defaulted on a large amount of debt owned by French and German pension funds”
    Show me the money.

    I don’t see a likelihood that any pension fund is still depositing at, repo’ing with or holding bonds of Anglo. The losses to bondholders have already happened with Anglo’s downgrades. Debt for equity would be a mark to market.

  27. @ YM

    i reckon an awful lot of German funds are both still holding Anglo bonds AND marking them near par on their books. Thats a personal view rather than something i have seen concrete evidence of, but its based on talking to guys in London who sell to those German funds.

  28. @Eoin
    then they are idiots who deserve to get hosed. But, they are not going to be hosed. Anglo can be wound down for very close to the cost of keeping it going over and abive the forthcoming injection. thats my view and I am sticking to it.

  29. @ Brian

    i dont deny their stupidity or that they should perhaps be punished suitably. Im just saying why its not going to happen. There’s economic principles, and there’s political economic reality.

  30. There is only about 8bn of anglo senior debt that is not secured or guaranteed plus about 2-3bn subbies. Most of the senior is short and will mature within one year.
    Given its maturity it is probably held by the banking system somewhere or possibly the credit unions. I would bet a deal of the subbies are in the hands of the CUs. the dirty little secret is that some of the seniors are held in Irish banks due to regulatory failure.
    Owing to the short duration of the debt, I doubt if much is in the hands of pension funds or insurance companies.

    Anglos loan book of 66bn is broken into 3 parts in all probability
    *land and development 35bn going to NAMA
    *15 bn other impaired stuff not going to NAMa
    *rest is performing.

    If you want to short cut NAMA and put it into resolution you need to fund a 50bn book i.e the NAMA stuff plus the impaired. You have the 4bn new govt equity, the 3bn subbies plus the 8bn at most seniors (some of which might already be gone.)

    A question for the banking experts out there…how do proceed form here? Does an AMC haircut the 50bn and buy the assets at say 35bn and wipe all the equity, subbies and seniors or does it pay market value of say 20bn and cut the next layer up of unsecured creditors….the depositors. Or does it pay 25bn and wipe out the IRish CB?

    If you are then left with a loan book with a 20-40bn market value, how do you fund it with assets of similar maturities. Borrow the money, I guess.

  31. @Dave
    Disagree strongly with you that David Mc W a ‘mediocre economist who got lucky’.It may not be pleasant for ‘heavyweight’/non-populist economists to have to admite it but his anaysis has been correct too often to be dismissed as ‘lucky’.Is Morgan Kelly lucky too ?
    @Colm McC
    Just because leaving the Euro would be very awkward and difficult (fully accepted) does not mean that it might not be the best solution.The concept of such disparate economies having one currency was fundamentally flawed to begin with.

  32. @BL

    NAMA:hope the EC mandates a large haircut to minimise the loss on Bad Bank 1? I would expect losses in excess of 20bn here.

    Bad bank 15bn of loans to Arnotts, Riverdeep, Quinn and god knows what else-funded by subbies, any seniors that can be roped in (settle for 5bn) and some state money

    recap the 15bn “good bank” of 10-15bn and hope to sell it as a going concern. this might have a good deposit base and might concievably be worth about 2-3bn in time.

    Cant see a loss to the taxpayer below 20bn though.

  33. @BL

    You and I know that 15bn is an understatement of the “investment”. It will be closer to 20bn.

    Of that maybe 10% will go to recap a rump good bank. This may yield a return for the state.

    The remainder goes to filling in a great hole in the Fianna Fail bank. Seanie had a hot line to the last two FF Taoisigh. 15bn euros plus 500m for the DDDA is the price Sean Taxpayer will pay for this access.

    Think Chernobyl

  34. @All
    As far as I know only one TD has ever mentioned the idea of leaving the Euro – and he condemned it.
    http://www.irisheconomy.ie/index.php/2010/03/27/ryan-save-anglo-or-leave-the-euro/
    Captain Kirk has abundant virtues but he is wrong on this. However, he is right on lots of other things and he speaks out for the public’s interests. We are not leaving the euro, we will never leave the euro, leave the Euro never we will. The German government’s threats to Greece’s euro membership have caused huge instability and I am sure massive cost. Also McWilliams is only a pundit, albeit an influential one. By constantly making implied negative comments about Greece Brian Lenihan, a MINISTER FOR FINANCE, has cost Greek taxpayers hundreds of thousands of billions of trillions of….insert rhetorical amount of your choice.

  35. @Paul M

    “Lucky” was probably the wrong word. He had the clarity of thought to see through the bullshit by which much better economists than him were seduced, but he doesn’t seem to have the same ability to see through his own nonsense. He seems to have been seduced by the idea of the “rogue economist” and will now peddle any old nonsense in the hope of repeating his original trick.

  36. Another take on the fundamental fracture within the Eurozone:
    http://www.nytimes.com/2010/03/29/opinion/29Starbatty.html?ref=todayspaper

    Obviously viewed from a US/Dollar perspective, but it shows how political momentum overrode rational economics. Reports of Chancellor Merkel’s desire to reopen the Lisbon Treaty to enforce increased fiscal discipline, although temporarily stymied, suggest that the political will of the EU elite to maintain the Eurozone remains strong. The question that remains is will the PIIGS continue to operate as viable political and economic polities in the face of the deflation and economic contraction required.

    Up to now, Irish people have been remarkably docile. Will this be sustained?

  37. @Colm

    I think you are right that you cannot simply devalue overnight but with a bit of sequencing and probably exchange controls, it should be logistically possible.

    Surely you create a new currency, New Drachma (ND), and fix it to the Euro? You legislate to redenominate everything to ND and make ND the official currency of Greece. During this period the fixed exchange rate is working like the eurozone 1999-2001 period but in reverse. Finally, you pull the fixed-exchange rate system as we did back in 1979 and let it float.

    I agree with the point that we are in the euro and that’s where we have to stay but I have to concede that there is merit in the argument that appropriate interest rates in the past 10 years may have helped to dampen the asset bubble and as the UK is proving, control over exchange rate policy is not a bad thing.

  38. @Colm McCarthy

    Montenegro mobilises its forces at the Greek Border! Informed Montenegran sources cite the renowned Irish economist Colm ‘Kutz’ McCarthy as stating that Greece about to be turned into Montenegro. Cosidering our history, it is wise to take precautions, noted the source.

    EuroIntelligence picks up the story here:
    http://www.eurointelligence.com/article.581+M5dc560e48c4.0.html

    Nice try Colm – to divert attention from my modest query on the NPRF – you start a minor diplomatic crisis in the Balkans! Been reading up on any history lately? Tut, tut, tut (-;

    The Skibbereen Eagle, New York Times, & Bloomberg are ouside your office! Be prepared (-;

  39. @Paul Hunt

    Sustained docility is the foundation of upper_echelon strategy within the extant Kleptocracy – I expect no change.

  40. I love the way the idea that Ireland was (or is) in some sort of optimal currency area with Germany was generally accepted (and not questioned) and that the idea of convergence was accepted. It truly is a wonder that the euro federalists believe that the powers that be can’t part the waves!

    I read Brian Cowen now wants us to give Greece loans provided they pay us higher interest rates than we pay for the money. Because that’ll help reduce our deficit!

    http://www.irishexaminer.com/ireland/kfkfojgbauau/rss2/

    I really must visit a darkened room!

  41. @Brian Lucey

    “WIND ANGLO_IRISH DOWN”.

    100% AGREE. On economic, social, moral, political, psychological, ethical, philosophical, historical, democratic, objective, normative, and subjective grounds.

    To do otherwise is to legitimize a Mafia state.

  42. Why does so much of the debate about the banking crisis, including the euro question, (especially on this blog) have to be of the smart-alec nature? All this calls into question the motivations of the bloggers in question. Whatever about leaving the euro, is too much to ask to leave out the ego?

  43. @Eoin & BL

    Some guy in Fitch in yesterday’s SBP more or less says the same – no difference in perception between banks and sovereign – ALL bonds viewed as essentially sovereign backed – ……….. and nationalisation not viewed as problematic – for the simple reason that de sovereign is ALL … which fits the facts.

    ……. SO LETS NATIONALISE THEM – TOMORROW – and CLEAN OUT THE UPPER_ECHELON BOARDS & BANKERS & DEVELOPERS & POLITICIANS WHO GOT US INTO THIS MESS – WE OWN THEM, but without the usual authority that goes with ownership as presently the upper-echelons are accountable only to themselves, and apparently only in their own interests.

  44. I think that the leaving the euro argument is a non runner for all the reasons put forward by M.H. above. Perhaps, we shouldn’t have joined in the first place as we’re just not disciplined enough to work alongside core countries like Germany. Our government used and abused the hard currency for its own ends and nowhere do I recall Colm McCarthy intervening to cry stop. I’m very much aware that economics is a none deterministic science, but there are unsustainable trends, driven by heard instincts that become very obvious early on and in the recent past ,our economists, bar one or two, did nothing to warn of pending dangers.
    Colm, like Garret Fitzgerald, is only a historian and now armed with a mountain of data and a big blunt axe, has nothing to offer other than a few desperate blows at the balloon and when it goes pop, then, that’s it, not a scintilla of forward vision beyond the bang or a tolerance for anyone with it.
    Ideally, we need full European Integration to make any sense of our currency membership – we’re too small to hack it on our own.

  45. @Paddy Orwell

    As your cousin George might put it – if you stick around here long enough, and lose your sense of humour, you go rapidly and rabidly insane as an understanding of the insanity of it all sinks in.

  46. @ David
    Nothing wrong with a sense of humour on the blog. I just don’t find egonomics either funny or helpful. It can, however, server to intimidate those who question the consensus. Not a very scientific approach!

  47. Lack of calm in some comments on this thread, but one point worth picking up.

    Many Irish economists, including moi, were not enthusiastic about joining the Euro, and said so at the time, on the grounds that it did not look like an optimum currency area (for us). Those concerns do not now indicate that we should leave. It’s a different calculus, and choosing exchange-rate regimes involves path-dependence in spades.

  48. Colm has highlighted some of the difficulties and uncertainties for any member to leave the euro. I’m not an economist but I long suspected that the shock of leaving the euro would be far greater than acknowledged by DmcW. And yet DmcW is to be commended for telling the truth when most commentators /economists refuse to admit there is a problem for Ireland with the euro. Does any one seriously believe that if the markets had been allowed to control our interest rates during the boom we would be in such a mess now? Euro interest rates set by Germany increased liquidity during the boom and led to the misallocation of capital. A currency that reflected our true worth as an economy would allow us to make rational decisions on how best to use our precious few resources.

  49. Colm,
    I’ll take your word for it that you advised against entering the euro. However, I don’t recall reading any persistent warnings from you in the mainstream media about the dangers of the housing and credit bubbles.
    As for this gem: Try this: go into a darkened room, with no windows, and think hard: what is the difference between a fixed exchange rate regime and a currency union? My guess is 1927 vs 1979?

  50. @Barry O’Brien

    Get a life! Responsibility for the local mess is in our own hands: fiscal policy, tax policy, p1ss_poor regulation, abysmal corporate governance, bankers gone bonkers, developers over extended, lack of political pragmatic intervention, idiotic neo_con ideology, – the root causes of this crisis are particular and local – low interest rates were not the problem; how we managed to adjust to such interest rates is an Irish matter. We don’t need external scapegoats – our Political/Governance sytems failed us abysmally: and they are still in situ.

  51. @ Colm
    Kosovo is a self-declared State. It has diplomatic relations with several (mainly Western) countries.

    The remaining countries view it as a UN administered territory within Serbia.

    Both views ignore the reality -it is being run by the NATO countries, until they can dream up some way to get out of there. Independence was supposed to be a silver bullet allowing NATO to exit, but it made things even more complex. Now they’re trying to hand over to the new EU Mission, but even this is not working very well yet.

    But to be honest, whichever interpretation you prefer, it is still a territory outside the Eurozone which uses the Euro as official legal tender.

    On the wider point, I would have argued years ago for staying out of the Euro to remain closer to the British pound. But after a decade of selling ourselves to multinational FDI as the Anglo-Saxon country inside the Eurozone, it’s far too late to start having cold feet about it. We’re in it, so we have to make it work for us now.

  52. John Muldoon: ‘I’ll take your word for it that you advised against entering the Euro…’

    You don’t have to John, it’s a matter of public record. There is a Google thingy on your computer somewhere.

    Some other commenters seem to think that the only reservations I ever expressed about macro policy over the last decade are the ones they can remember. Lazy, and bad manners.

  53. I pretty much agree with Colm above, my point is that the social cost of continued “convergence” experiment (perhaps divergence in reality?) will be too high to be tolerated. This is, of course, highly political.

    It is, of course, a lot better for those in secure employment to be paid in a hard currency that allows them to purchase foreign goods and services at a reasonable price and there are a lot of people (in employment) with a lot to lose.

    Surely though someone, somewhere, should be looking into how leaving the euro could work in practice. I take Colm’s point about the severe practical difficulty and cost and that it may well outweight the benefit…

    Four professors write in today’s FT,

    “The Greek action is painfully reminiscent of Germany’s ill-fated moves to slash spending in the 1930s slump, which taught the world that cutting budgets to appease creditors in a downturn generates mass unemployment and radicalises society.”

    http://www.ft.com/cms/s/0/6a618b7a-3847-11df-8420-00144feabdc0.html

    I wonder what they would think of cutting spending to appease bank creditors!

    The said 4 professors in today’s FT that are looking for Germany to reinstate the D-mark are:

    Wilhelm Hankel is emeritus professor of economics at the University of Frankfurt/Main; Wilhelm Nölling is professor of economics at the University of Hamburg; Karl Albrecht Schachtschneider is emeritus professor of law at the University of Erlangen-Nuernberg; Joachim Starbatty is ememeritus professor of economics at the University of Tuebingen.

    The other interesting point is how people will vote in a referendum if Germany pushes for a treaty change to allow withdrawal. Should people vote for said change in the knowledge it will allow Germany to leave or PIIGS to be pushed out. If the euro federalists were to vote no, what would happen then. The scaremongering works in the other direction too!

  54. @Ciaran Daly

    Non_issue – Germany is going nowhere – it has its own clique of nationalist, right wing little germanders – as we do.

    @John Muldoon

    Colm McCarthy, unlike Ned O’Keeffe’s piigs, still has his b***s – unlike many of not most supine academics , few around here excepted. If he says he opposed it I believe him. On the Euro now – I 100% agree – again a non-issue – we are going nowhere. On other matters I may [& DO (-;] totally disagree with Colm McCarthy – this is substantive discourse – and an extremely weak Irish public sphere needs more of it.

  55. @ David O’ Donnell

    To ere is human, to forgive is divine. People who are given the wrong information by a distorted market will make poor decisions. Capital inflows into Ireland should have affected the price of our currency, the euro remained relatively cheap. The government and the banks where given free money and so they spent it. No amount of regulation can stand in the way of ‘irrational exuberance’.

  56. – how the introduction of a new currency in current circumstances would be executed:

    I thought it was obvious what would happen if we left the Euro: we just peg ourselves to sterling. Exactly where this country was from independence until we went into the ERM.

    – how it would pan out in macro-policy terms:

    A lot better than the Euro. The UK is our biggest trading partner so that removes the exchange rate risk for the majority of our exports. We would be pegged to a steady, solid currency and we would be approx at a 30% discount form where we are today.

    Come on Colm, this isn’t difficult to figure out.

  57. – how the introduction of a new currency in current circumstances would be executed:

    I thought it was obvious what would happen if we left the Euro: we just peg ourselves to sterling. Exactly where this country was from independence until we went into the ERM.

    – how it would pan out in macro-policy terms:

    A lot better than the Euro. The UK is our biggest trading partner so that removes the exchange rate risk for the majority of our exports. We would be pegged to a steady, solid currency and we would be approx at a 30% discount form where we are today.

    Come on Colm, this isn’t difficult to figure out.

  58. @Barry O’Brien

    Give my regards to Auntie Sally – always thought she looked amazingly irrationally exhuberant – believe she is back in vogue in certain quarters?

  59. @ rubensni

    The UK was our biggest trading partner in 1973 when 55% of total exports went there.

    The inconvenient truth is that the Eurozone has been for some time!

    @ All

    Some people foolishly ignore that beyond economists and people known through the media, there was a significant constituency that had never drank the FF/PD Bubble Kool Aid.

    The whole country wasn’t full of eejits!

  60. @ rubenshi

    agreed, a bit oversimplified though, there would be a fair time constraint and by the time it comes around (because Ireland is sooooo fast and efficient) one might hope the economy will have picked up…

    although would we have to peg ourselves to the sterling? why not just use the Punt instead?

  61. @Michael Hennigan

    “The whole country wasn’t full of eejits!”

    Still isn’t Michael. Keep those pikes in the attics in pristine condition!

  62. rubenshi, yann coffey: don’t miss the main point please.

    We don’t have a punt, we abolished it. Entirely. Gone, finished, kaput. Ireland no more has a currency than does Massachussets.

    Before we linked to sterling, or anything else, we would have to launch a new currency, from scratch, and persuade people to hold it.

  63. @yann coffey

    The punt was pegged to sterling until 1979 when we joined the ERM.

    The broader point is Ireland is too small to have a free floating currency.

    @Michael Hennigan – Finfacts
    “The UK was our biggest trading partner in 1973 when 55% of total exports went there.
    “The inconvenient truth is that the Eurozone has been for some time!”

    We’d still be in the EU Michael, just we’d be pegged to a weaker currency. Even our MNCs exporting into the Eurozone (if it continued) would benefit from a weaker currency relative to the Euro. Sterling fits the bill

  64. @All

    WE ARE EUROPEAN. WE SUPPORT THE EURO. WE SUPPORT ALL EURO_ZONE MEMBERS IN SOLIDARITY. WE PLAN TO EXPORT MORE TO OUR EURO_ZONE PARTNERS IN EUROPE & IMPORT MORE. WE SUPPORT A STRONG EUROPE. WE OPPOSE LITTLE NATIONAL_LANDERS & ZENOPHOBIC FRINGES THROUGHOUT EUROPE, INCLUDING IRELAND, WHERE_EVER WE FIND THEM.

    WE ARE EURO_IRISH, AND PROUD TO BE EURO. OVER AND OUT!

  65. @ M.H.

    “The whole country wasn’t full of eejits!”
    If not, then, who voted in the present government?

  66. @ M.H.

    “It’s easy to conjure up the potential for trade from the comfort of an armchair.
    We saw recently how the Innovation Taskforce ignored the market/demand side.”

    We’re don’t have much choice, but to imagine things, at this point and when we’ve got something real to sell, then we’ll have to set about creating a market. There’s no point chasing after big established markets, they’re already well covered. Our future is in niche and novel sectors that are too small to be of interest the big boys, but ideal for small and flexible companies.

  67. @ colm mccarthy

    ‘Before we linked to sterling, or anything else, we would have to launch a new currency, from scratch, and persuade people to hold it’

    Wikipedia says
    ‘A new pound was introduced in 1928, although monetary union with sterling was maintained. This new Irish pound was initially known as the Saorstát pound (“Free State pound”) and was pegged to the pound sterling’

    I guess people were ‘persauaded’ by capital controls etc. That’s not considered cricket these days, but the Chinese seem to make their own rules.
    Euro exit would be gruesome, but internal devaluation seems equally grim. Choice of hanging or beheading I suppose.

  68. @Paul Quigley
    You might make a hypothetical case that if we had known what was coming just before it happened we might have considered leaving the Euro.
    But to use the phrase we all hate, we are where we are. Now that we have (hopefully) hit the floor should we devote our energies to preparing for a new currency? Why not take radical steps to speed recovery instead and keep our currency?

    @David O’Donnell
    Colm McCarthy is I would believe on the right. That’s his business. We are spending a lot more than we are taking in. That means spending cuts in the short-term, whatever your political views. It also means tax increases in the short-term, so I suppose that makes it a politically neutral process. I think we should go with perhaps FG’s proposals for an off-books stimulus, combining it with TASC’s suggestions. It would be a mini new deal, just to change the national conversation to something more hopeful, if nothing else (and combined with a change of government). But that’s another issue. As are the tax breaks, pork spending and protected sectors we need to tackle if we are to recover quickly and create an equitable, stable society.

  69. @ All,

    Ed said: We’re don’t have much choice, but to imagine things, at this point and when we’ve got something real to sell, then we’ll have to set about creating a market. There’s no point chasing after big established markets, they’re already well covered. Our future is in niche and novel sectors that are too small to be of interest the big boys, but ideal for small and flexible companies.

    What Ed is saying makes perfect sense to me. However, the language of business school may not be something too many economists will warm to. It is crucial however for Ireland’s sake that economics and business are brought together somehow with innovation at university level. I don’t mean innovation as it university research leading to spun off entreprise startups. In my opinion if we try to do that in Ireland we will waste a lot of good money after bad. The best innovation by far we can do in universities in Ireland, is as follows (I do hope CMcC and others can take this on board). We should offer students from all faculties at university level, a business school lite version. Namely an intensive certificate course, that could be completed within months, maybe a group finishing every quarter or something like that. It would consist of maybe one day a week, built in simple modules to give the students from all faculties an idea for what innovation is about. Even students who work a lot in design, say the architecture faculty at UCD could benefit enormously from a brief certification course like I described. If nothing else, it would introduce a whole generation of multi-faculty graduates to the basic tenets in business and innovation. What Ed spoke about in his comment, I quoted above is straight out of Clayton Christensen’s theory on disruptive companies. I have encountered computer science and technology graduates in my life, and also enjoy that sort of company. What always strikes me about the computer science folk from the US, is they frequently have a firm knowledge of such business theories, to match up with their basic technical knowledge. I suggest that some evening at UCD, you invite me to come along and sit down on a panel in front of the senior students in one of the societies, or perhaps a joint society event, and I will be welcome to field even the dumbest questions, from the most far out characters there are today at UCD. I can do no more than offer my services. The moderator here has my e-mail address. But what I am suggesting would be far, far more beneficial for Ireland than millions spent on other innovation initiatives for Irish universities. I would be willing to offer my services to help with a draft syllabus also, if anyone cares to bother.

    To translate this into economics speak, for the benefit of those here at the Irish Economy blog, have a listen to the podcast of Paul Romer (Stanford university) talking about growth, linked at Stephen Kinsella’s website. The classic black box created by economics to view the world, is the one where labour and capital are put together in the same place, and out of it comes productivity. What Paul Romer suggests, is that everything which can be described as output is only stuff that existed already. All that happened was it got re-arranged in some different way. But classic economic theory never looked very hard at what happens inside that black box. This is a very nice intersection point I think, between business school language and economic theory, which I am sure people here will appreciate that. It is a definition that can be used to look at green energy generation. In the past, we transported vast amounts of fuel to the power station. In the future, we are trying to move the power station to the fuel (with some amount of difficulty it appears, involving new technical challenges and so on). BOH.

    http://www.stephenkinsella.net/2010/03/25/fantastic-podcast-on-trade/

  70. @Oliver Vandt

    What – ‘Colm McCarthy on the right…’ – I’m shocked, truly shocked! Spose he can be ‘on’ the right in general, and ‘in’ the right in this particular instance. But as you put it – ‘That’s his business’ – Quite! I can always deal ‘with’ , discourse with, the ‘right’ as distinct from being ‘dealt to’ by the ‘right’ – unless he’s a Sharah Phelanite? No – couldn’t be – he engages at times. I’m off all ideologies anyway … for ever … they are dangerous. I’m into ruthless pragmatism at the mo ………

    On the future – and the present – how do we get rid of this lot before 5 o’clock tomorrow … er … today. Less than 17 hours – and a few seconds to meltdown. And do you know what – they almost certainly won’t even properly screw us – they will only 75% screw us, three quarter screw us …… leave us barely hanging … and then they will come back for more, the last quarter. Gotta mobilize ……. they won’t GO – ergo, they must be PUSHED. Only question is HOW?

  71. @CMC

    The whole premise of your original post was that the drachma (and the punt) are dead and therefore impossible or next to impossible to resurrect. I think repeated instances of history and some of the posts on here have shown that it would be possible with exchange controls, sequencing etc. and I think you concede that although difficult it would be possible – “Before we linked to sterling, or anything else, we would have to launch a new currency, from scratch, and persuade people to hold it.”

    The real question then is not so much would it have been better to have remained outside the euro but would it now make sense (rather than being impossible) to secede from the currency. I don’t think it would make sense now but that is the question that should be asked.

    As_an_aside,_what_is_with_the_under_scores,_David_O’_Donnell?

    And aside eile, BOH, could you just post a link to your blog so I can avoid repetitive strain injury to my finger from all the scrolling past your long posts?

  72. The lazy, greedy Irish always want to take the easy way out and will slavishly defend any liar who can convince them that s/he has an easy solution.

    The Irish always are loyal and strong and even when they have been badly damaged by economic warfare, they stick to the wisest policy even at the cost of short term loss.

    The Irish are fantasists who relish the idea of being rich without having to postpone consumption.

    Which of these three statements is the most true? Does it matter that we do not study and eliminate our weaknesses?

  73. @ David O’Donnell

    Take one banking mess. Add new rules and taxes to taste. Stir. Repeat. Who’s the real Aunt Sally? Or take a fresh look at the role of euro played in our financial crises.

  74. @ Colm,
    Agree with most of what you say, and maybe you might be right saying it would have been better not to join the Euro back then, but that supposes that sensible people like yourself would’ve been in charge and managed things correctly. The problem with that is there is a high probability that the same muppets, more-or-less, would’ve been in charge, and would’ve been just as irresponsible, thinking they had created something wonderful, and we might well have ended up like Iceland without any help.

  75. Germany manages the expulsion by writing new legislation designating a new DM as legal tender, initially fixed at par for the Euro.

    Then they get printing, convert banking balances immediately and gradually bring the new currency into circulation. Once progressed, they float the new Neudeuschtemark thereby cutting Greece and Ireland and Spain adrift. We wil have to sort our own mess out.

  76. Barings were badly run and let go.
    Lehman Brothers were badly run and let go.

    Anglo Irish was badly run so it is saved.

    Makes no sense particularly when liquidation was going to cost €20 billion and that is what saving it looks like costing.

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