EMU - Strength in Numbers or Collective Suicide?

Time Magazine

Ireland does not have its own monetary policy, nor has any other nation in the Euro; interest rates are decided by a committee (the European Central Bank) under the single currency.

All Hail the Euro


Or should we?

This integration creates the possibilty of severe problems. One can understand how a small town can be devestated by the loss of a major industry/employer, but this having a relatively small effect on a neighbouring town. Much the same applies to Europe. Ireland does not have the ability to alter its monetary policy to accomodate for periods of strong growth or stagnation, it is dependent on the ECB's opinion which is rightly based upon the needs of the larger member-states.

What do people think of such integration? Will Britain join? Any thoughts on the potential of a global currency in some far-off decade?

dRNk SAnTA

I think it would be beneficial to us if Britain joined because a large portion of our exports go to Britain and fluctuating exchange rates don't help us much.

What you are saying is true, we have lost the ability to control our monetary policy. Whenever our growth period comes to an end, we may well regret this situation. On the other hand, being part of the EMU allows us to benefit from very low interest rates, and although they are rising at the moment they will always stay way below the kind of rates we had before joining the EMU.

Not forgetting that we were in full control of our monetary policy for decades and they were hardly the most prosperous of times. I believe we devalued twice in the late 80/early 90's didnt we? And speculators were playing havoc with the punt.

europerson

Hey, Ibid, whoever you are: you stole my idea for a certain debate...!

I think that the EMU hasn't been fully tested yet. For example, German budgetary issues, coupled with that country's low growth will be tackled by the ECB, whilst Ireland will (it is hoped) still be a high-growth economy. Yet, the interest rate changes demanded by Germany, etc. will be applicable to all.

Time Magazine

dRNk SAnTA wrote:

Not forgetting that we were in full control of our monetary policy for decades and they were hardly the most prosperous of times. I believe we devalued twice in the late 80/early 90's didnt we? And speculators were playing havoc with the punt.

I have to disagree with you here. We were never fully free. We were tied to the £, and then the DM.

mike65

The punt was fixed 1:1 with Sterling until 1979 when it switched to the forerunner of the EURO the ERM/EMS. The punt was devalued by 3.5% in 1984 and twice in 1986 against the DM (8%) and 10% in 1993.

We should be very glad such mayhem is behind us.

Mike.

Waltons

mike65 wrote:

The punt was fixed 1:1 with Sterling until 1979 when it switched to the forerunner of the EURO the ERM/EMS. The punt was devalued by 3.5% in 1984 and twice in 1986 against the DM (8%) and 10% in 1993.

We should be very glad such mayhem is behind us.

Mike.

QFT. Mike's damn right

Time Magazine

Advocatus diaboli:

Let's assume the strong Christian Democrats in Deutschland continue their little run in the German economy and get it down to, say, 5% unemployment with 3% growth rates. This is a reasonable target for four or five years away.

It's also quite possible that Ireland will have taken a position similar to what Germany is now. Let's say interest rates rise to accommodate for Germany (et al)'s new growth and the construction sector, which employs something in the region of 300,000 people, suffers. Furthermore let's say the FG/Lab coalition get into government and there's a slight set-back to producer confidence impacting on consumer confidence. In this situation we could make use of a suitable monetary policy facility.

All fun and games?

My personal opinion is that we have a huge fiscal policy programme with the ability to cut if necessary. Furthermore, there's plenty more we could spend if necessary. So with that facility, where are upper-tax band is 42% (as opposed to San Diego's 9%), we rely on monetary policy relatively low enough.

I can't see monetary policy going global any time soon. It's just impractical. I expect and hope Britain will join in the next five years or so.

Troglodyte

Hmmm. Personally, I've always been quite jittery about Ireland's loss of monetary independence. The fact that we've had historically low interest rates in a period of historically high economic growth seems to bear this out. This situation has lead to an almost disturbing explosion in credit growth, making us grossly over-indebted and giving us a massively overheated property market.

Over the next few years, our growth rate is bound to slow somewhat. Think of the scenario then. A slowing Irish economy with enormous levels of personal debt and an overheated property market. If the ECB decides to really jack up interest rates due to a European economic revival (as may well happen), the effects on the Irish economy could be pretty unpleasant. As Ibid mentioned, we could use fiscal policy to help us out of such a difficulty, but I just feel that fiscal policy on its own may not be sufficient. And remember, it's lack of monetary independence that helped us to get into this mess in the first place.

Of course I'm being quite pessimistic here. But this could well come to pass. And cracks are forming in the EMU. Italy is starting to grumble about being in the Euro, since it can't resort to its usual solution to economic stagnation - currency devaluation. Italy withdrawing from the single currency is a slight possibility. The bond market sees this, and the yield on Italian government bonds is about 30 basis points higher than most other Eurozone government bonds, reflecting that possibility.

As for Britain joining soon, don't count on it. The UK is doing fairly well at the moment, very stable with respectable growth, and there is little popular support for the single currency. As you all probably know, the City of London is really thriving at the moment, and Sterling is now more traded on the fx markets than the Yen (a recent development). Most European currency trading actually occurs in London. Britain has absolutely no reason for joining.