In today’s Examiner, PJ Rudden estimates the costs of changing government waste policy (as opposed by the ESRI) at around 2.5 billion euro and warns that environmental quality may deteriorate too. As Rudden points out in Friday’s Times, his cost estimate omits the damage to Ireland’s reputation should the government decide not to honour the contract with Covanta, and indeed the cost of breaking the contract.
Year: 2010
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.
Following on from yesterday’s post on misleading hyperbole about Greece choosing to leave the euro or being expelled from it, it was truly depressing to hear an Irish minister today raise the prospect of Ireland having to leave the Euro.
On RTE’s Saturday View program, Minister Eamon Ryan said the following in relation to Anglo Irish Bank:
It would be so nice if we could say we’ll let it go and that will be the end of that. The reality is … and that’s kind of Fine Gael’s position and what Labour seems to be saying. There are .. That means that we have to go and effectively say to the European Central Bank, who has a lot of money in deposit in Anglo, and say sorry we can’t pay you back. Now the European Central Bank, it hasn’t allowed a bank fail across Europe. So we would probably then have to leave the Euro. Now the risk of that, in terms of the tens of thousands of jobs that could leave this country because they’d say well Ireland is a riskier country to do business in, we don’t really want to do business there. That is what you’re talking about. So, it’s not easy, it’s not palatable but that’s the choice you’re faced with.
When RTE political reporter Brian Dowling then discussed the idea that there were alternative options to take, Minister Ryan confronted him saying “Do you think we should leave the Euro?”
I think that these are extremely unfortunate statements for an Irish government minister to make.
The facts are as follows.
1. Whatever happens with Anglo, Ireland will not be leaving the euro. Minister Ryan’s assertions that we would essentially be expelled from the Euro if an Irish bank failed to pay back the ECB are groundless. This is not just my opinion. An ECB legal working paper summarises this issue as follows: “while perhaps feasible through indirect means, a Member State’s expulsion from the EU or EMU, would be legally next to impossible.”
2. The ECB has always been aware that it could lose money from making loans to a bank that is then unable to pay it back. This is why its loans to banks are all collateralised, based on a well-developed list of eligible collateral. This list does not include development loans. While it is still possible for the ECB to lose money on its loans to a failing bank (if the collateral turns out not to be worth the value of the loan) there has never been any rule that such an event would result in the country the bank resided in having to leave the euro.
3. There are, in any case, options for dealing with Anglo’s insolvency that could save the taxpayer money without going as far as failing to repay its ECB loans. For instance, Anglo could be declared insolvent and its subordinated bondholders fail to be repaid, while the Irish government could choose to pay back other more senior creditors. There are serious issues to discuss here. The prospect of leaving the Euro is not one of them.
The bottom line here is that Minister Ryan’s statements about leaving the Euro are without foundation. However, it is perfectly possible that they could form the basis for unfounded speculation that Ireland is somehow on the verge of leaving the Euro. I would urge Minister Ryan to issue a clarifying statement correcting these assertions as soon as possible.
As we await perhaps the most momentous set of financial decisions ever taken by an Irish government, the consistent evidence that senior Ministers do not understand the banking situation is extremely worrying.
Peter Boone and Simon Johnson point out some potential limitations of the Canadian banking system in this post over at The Baseline Scenario.
I read time and again, for instance here, that Greece’s debt crisis “threatens the euro”. Indeed, there are lots of right-minded people around Europe who worry deeply about this threat and have determined that a Greek default has to be avoided to save the euro. I’m having trouble, however, figuring out what that this is supposed to mean.
There seem to be different interpretations of what the “threat to the euro” is. The more dramatic interpretations invoke the idea of an existential threat. Others view it as involving reputational harm. I’ll take each of these ideas in turn.