Reminder: DEW 2013

@Gregory Connor,thanks Gregory looking forward to reading it.All the best with the paper and the conference.

Thx Frank

The slides which I used in my DEW presentation – on why Ireland should restructure its debt and exit the Euro – are available here:

http://www.scribd.com/doc/177530858/PLAN-B

This is the summary of the key points of my DEW presentation:

1. Eurozone membership caused a monetary policy induced debt and real exchange rate crisis

The Eurozone falls far short of the conditions for an Optimal Currency Area. A key symptom of this is that an interest rate appropriate to the Eurozone as a whole is very significantly inappropriate for large regions of the zone. For the first decade of EZ membership this resulted in an interest rate much too low for Ireland’s circumstances. This caused Ireland’s property and debt bubbles as well as very significant real effective exchange rate appreciation.

2. Plan A can’t work and isn’t working
Plan A can’t work.

It addresses symptoms and not causes. The consequences of an inappropriate interest rate regime – insolvent banks, rampant government spending deficits, grotesque unemployment rates – are the objects of policy-makers. The monetary policy cause of the crisis and real effective exchange rate imbalances are not. Growing aggregate debt levels across the Eurozone periphery (including Ireland) demonstrate that Plan A is not working.

3. Plan B is a monetary policy / exchange rate solution allied to debt restructuring

The appropriate solution for Ireland is that recommended by the IMF on countless occasions where previous credit bubbles have led to over-indebtedness and exchange rate imbalances: debt restructuring, domestic reform and currency devaluation. This requires Eurozone exit. Ireland could then grow again quickly with deleveraged balance sheets and a more competitive exchange rate, like several emerging markets after defaults and devaluations in the late 1990s.

4. The broad details of Plan B are clear

The mechanics of Eurozone exit and debt restructuring are clear in principle, even if difficult in practice. They would involve special sittings of the Oireachtas, bank holidays, capital controls, currency stamping and printing, expedited bankruptcy proceedings and negotiations with Ireland’s creditors. They would also render Ireland’s banks insolvent once again.

5. Plan B has high upfront costs and could trigger significant collateral damage

There will be some clear winners and some clear losers resulting from any decision to opt for Plan B. There is also the danger that an Irish EZ exit coupled with other EZ exits could unleash financial contagion and cause collateral damage on a global scale.

6. Any decision to opt for Plan B will come down to politics

Since 1916 the Irish political establishment has been clear about one policy direction, whatever the political colour of the day: we want less Britain and more Europe. Any EZ exit decision would fundamentally reverse this stance. It would also require politicians to do something for which they are not renowned: make a decision with high and definite upfront costs and hard-to-quantify medium term benefits. But the alternative, in the words of Bush White House economic advisor Pippa Malmgren, is a “twenty year economic slump”.

The Lucey Plan B is worthy of serious debate. However, it will be ignored by the commentariat because it raises uncomfortable questions. Meantime, at a Citibank function, Buiter quoted as saying Europe owes Ireland 30-60bn for taking one for team. It seems after 90 years of chequered Independance we have swapped British hegemony for a more insidious German hegemony. Give me the Brits every time.

@Cormac Lucey / @Tull

Congratulations to Cormac Lucey on a very courageous presentation.
One of the best parts of the presentation was the look of astonishment on the face of Peter Breuer (IMF), at the end of the presentation, when the audience reception was much more than that of polite applause.

Peter Breuer’s IMF solution of fix the banks, fix the banks again and fix the banks again and again is getting more empty by the day.
It emptiness was further underlined by Alan Aherne opining that the State might ‘lob’ a further 25 billion of part thereof into the banks, if the new stress tests showed up more losses (labelled ‘a need for recapitalization’ in the jargon of the day).
Nobody demurred.
Its looks as if ‘we’ (official Ireland) might prepared to bankrupt the State a second time to ‘fix’ the banks. ie. Pay the further and continuing losses of investors, both private and official.
On whose behalf is the State to be bankrupted a second time?

It’s important that a big issue like this is addressed when only a fool would argue that the EMU is immutable.

There are a lot of angles to the issue and Cormac covers some of them.

The presentation suggests that the insiders who do well from the system would only contemplate a return to the punt in a dire situation.

Imagine the silk hierarchs in the Law Library voting for a democratic or fairer system!

People got used of a lifestyle during the bubble that was built on leprechauns’ gold and it has been sustained since the crash by loans akin to ones available in Asian casinos frequented by Chinese where the losing punter is always helped real-time by the sharks that are let in for that purpose.

The Irish Times today has a piece on teachers’ pay. What is interesting about for example Finland and New Zealand is that in purchasing power parity terms teachers are paid significantly below Irish teachers and their pay corresponds with the average of pay of 3rd level workers in their countries, but in Ireland teachers are at 80% of the Irish average.

The problem with the exit scenario is not the potential losers but the time it could take the potential winners to realise that they are not losers.

Recent big examples of default are not very useful as guides as a remarkable trend came to an end about a decade ago – falling real commodity prices through most of the 20th century.

The blanks that need to be filled in are how the indigenous manufacturing sector that ticked along in pre-euro times, net of increased priced imported inputs, would be able to boost exports.

On the internationally tradable services side, the indigenous sector is not material and in agriculture a half billion worth of fruit and vegetables are imported annually.

In recent years Iceland could at least feed itself and it was seen as the model by a lot of people. However, it has a lot of problems and a recent report suggested that current account surpluses would not cover non-krona private sector debt in coming years.

It would surely be naive to expect positive responses from the IMF and ECB to a unilateral default.

What are the implications for the FDI sector?

Unless Barryroe (previously a townland between Bandon and Kinsale) pays big oil dividends, its’s unlikely that Ireland could forge a path to prosperity by asserting independence and absent some credible engine for sustainable jobs, we would end up closer to Belgrade than Berlin.

It’s also a reality that the present path may see us at the same destination.

Plan b with big upfront pain and vague mid and long term ramifications will be a very hard sell to independent woman. 20 years of EZ crap only has 15 more years to run , par contre…