Leaving the €uro: Pros & Cons?

The Minstrel

Alot of informed comment suggesting our only solution is to exit the Euro and devalue our currency in much the same way as Iceland has done. Indeed, Portugal are making noises about opting out. Would this lead to spiralling interest rates?

What are the pros and cons of leaving the euro-zone?

ei.sdraob

1. dump our debt into EU
2. cut the deficit
3. leave euro
4. ???
5. profit


:eek: Fianna Fail's "cunning" gameplan :P

Sleepy

Con:

• Flight of MNC's who've based their European headquarters here.
• Capital flight as those with money move it into foreeign banks, gold or other non-'punt-nua' denominated accounts
• Erosion of savings held in 'punt-nua' as it depreciates against the Euro
• Cost of borrowings increases as 'punt-nua' becomes less valuable than the currency our external debt is denominated in
• Imports become far more expensive.

Pro:

• Improved competitiveness as punt nua depreciates against Euro, Dollar and Sterling.
• Boost to exports based on the above.
• Mortgages and other debt is reduced as it is now denominated in punt nua which will depreciate. Only matters to average Joe if his income is in a different currency. (could lead to a flight of talent as people seek to be paid in Sterling, Euro or dollar?)
• Would cement current Fianna Fail's position as 'worst government ever'

raymann

a year ago any talk of leaving the euro would have been dismissed as ant eu nonsense. now here we are, its being fully talked about as a viable alternative.

the thing that really scares me is it might our best option. how did we **** things up so badly.

SkepticOne

There are a lot of good aspects to being in the Euro. The main one is that if you have savings, then they are in a currency where monetary policy is dominated by Germany. Thus inflation is going to be kept low and the currency is going to hold its value. Currency risk is eliminated when trading with companies in other currencies. Also it is nice to be able to travel in the Eurozone countries without changing money.

I think a mistake a lot of people made, however, was in thinking that the Euro in some way protected profligate Ireland against the financial markets. When the crisis broke, I remember a lot of people saying that at least we are in the Euro and therefore we're safe. We now know that is not the case. We are just as vulnerable except that, instead of taking it out on us in in foreign currency, the attacks are limited to the bond markets.

If traders were merely selling our currency then Ireland would suffer a devaluation. This, of course, is not nice if you are a saver however if you are an exporting business you are given an short term competitiveness boost. Thus, there's a bit of stability built in.

However the bond markets are a different story. If we are punished in the bond markets then we are forced to pay higher interest rates and this in itself undermines competitiveness which in turn drives the yields higher. This is inherently unstable.

What we gave up in joining the Euro was the ability to allow the markets to set the price of the currency and we entered essentially sort of price fixing cartel where, regardless of the states of the respective economies, the same price was set for the currency. Whenever you try to do this, you get imbalances and that is what we're seeing in the Eurozone. The various committees to oversee budgets won't work any better, imo, than the various committees the Soviet Union set up to set prices.

3DataModem

Sleepy wrote: »

Mortgages and other debt is reduced as it is now denominated in punt nua which will depreciate. Only matters to average Joe if his income is in a different currency. (could lead to a flight of talent as people seek to be paid in Sterling, Euro or dollar?)

Wishing...
And Hoping...
And Waiting...







(By the way it will not be "punt nua" it will be "Bart Bucks")

Inquitus

Sleepy wrote: »

Mortgages and other debt is reduced as it is now denominated in punt nua which will depreciate.

That debt is held by major financial institutions around Europe and indeed the rest of the world, I don't see how it could be switched from Euro to Punt. More likely anyone with a Mortgage will have a euro debt to service on devalued punt wages.

SkepticOne

Inquitus wrote: »

That debt is held by major financial institutions around Europe and indeed the rest of the world, I don't see how it could be switched from Euro to Punt. More likely anyone with a Mortgage will have a euro debt to service on devalued punt wages.

I don't think so, to be honest. If Ireland leaves the Euro it would probably be in the context of a default. Leaving the Euro, and re-denominating debts owed by Irish institutions to foreign ones into the new currency would simply be part of the form that default would take.

Sand

As Sleepy has pointed out, massive capital flight/bank runs will occur as soon as its even whispered Ireland is about to leave the Euro - and given problems as simple as vending machines, stocking ATMs and so on that isnt something that can be done overnight. The only thing that has prevented capital flight so far is that belief that Ireland is backed by the ECB.

And devaluation is possibly the most unfair solution to our problems: a 30% devaluation is an immediate seizure of all wealth held in the devalued currency. And it will fall hardest on the poorest sectors of society who are so much less likely to hold assets abroad in foreign currencies. And given the insider class within Ireland, you can be sure it would be the connected people who would best prepare for the devaluation by moving their assets abroad.

I dont think we will get a boost to exports either - 90% of Irelands exports originate from the MNC here, who import practically all their inputs. Whats gained on selling the exports, will be lost on buying the imports, assuming the MNCs even decide to do business in a currency as weak and untrusted as a Punt Nua. Id expect practically all MNC workers would prefer to be paid in Euros.

Also economic growth occurs best in conditions where investors can make reasonable assumptions about the risks they are facing. A stable euro is a benefit, a Punt Nua which would go up and down like a yo-yo any time there was a problem would be a liability.

Panrich

What effect would this have on tracker mortgages?

Sand

Honestly thats impossible to say. The banks hate tracker mortgages. In the chaos of euro exit/capital flight/bank run/devaluation/default its unlikely theyll be much more respectful of their contracts with individual borrowers than they would have been with their institutional creditors.

I wouldnt rely on your contract with the bank to be legally enforceable in the context of a euro exit.

Dorcha

A few questions here for the knowledgeable:

If currency trading is buying and selling currencies, then how does it affect the countries involved?

Why is trading in currencies allowed at all?

Why can not the rate of exchange between currencies be set once and for all and left that way?

Sleepy

That's exactly what the Euro is (or rather, it's pre-cursor the EMU, was) Dorcha - a set exchange rate between currencies.

Sungodbr

Why can not the rate of exchange between currencies be set once and for all and left that way? [/QUOTE]

surely there always has to be allowances made for countries to get stronger and weaker and there respective currencies to get stronger and weaker as a result

johnnyskeleton

Two problems make it, if not impossible, then at least very difficult to leave the Euro:

1) our external debts are mostly denominated in Euro. If we leave and get a new currency, the real cost of servicing our debt will be increased due to the relative strength of the euro;

2) ireland is a constitutional democracy where property rights are respected. Thus, if a bank owes me €50, I can insist on being paid that in euro not in the new currency. When the euro changeover took place, people were given the option to take out their savings in punts and keep those notes, and as the punt ceased to exist it would be pointless to do so. The Euro, by contrast, will remain, and if a contract is in euro I don't see how this can be altered into a new currency by way of statute.

The only constitutionally acceptable changeover to my mind would allow people to choose whether to keep their savings and existing contracts in euro or redenominate to the new currency. I can't imagine that there would be much of a take up in this. Things like PS wages and Social welfare can be redenominated in the new currency going forward, but debts already incurred probably can't.

That said, they may try to force a change through.

ArmaniJeanss

Dorcha wrote: »

Why can not the rate of exchange between currencies be set once and for all and left that way?

Because once a country decides to print more of its currency then by definition it immediately changes its rate against other countries.
So if say the Euro to Yen rate was set as 1 Euro to 5 Yen and (to use your words) 'left that way' what would happen if the Japanese decided to double the amount of yen they print in a year? They've effectively halved the value of the yen but yet can still buy a Euro for 5 yen.

If rates are fixed then countries can't decide how much they print or set their own interest rates - this situation would be effectively One World Currency.
And you see how difficult a single currency (euro) has been to organise amongst 15 or so of the most affluent countries in the world.

Hope that makes sense, maybe someone can explain it much more succintly that me.

Tora Bora

The Minstrel wrote: »

Alot of informed comment suggesting our only solution is to exit the Euro and devalue our currency in much the same way as Iceland has done. Indeed, Portugal are making noises about opting out. Would this lead to spiralling interest rates?

What are the pros and cons of leaving the euro-zone?

The clever guys who have already converted their euros into some other currency, or gold, would become "punt nua millionaires" overnight:cool:

SkepticOne

Sand wrote: »

As Sleepy has pointed out, massive capital flight/bank runs will occur as soon as its even whispered Ireland is about to leave the Euro - and given problems as simple as vending machines, stocking ATMs and so on that isnt something that can be done overnight. The only thing that has prevented capital flight so far is that belief that Ireland is backed by the ECB.

But we've already seen massive capital flight and it is ongoing and not related to Ireland leaving the Euro but to fear that the Irish state will be unable to service its debts within the Euro.

And devaluation is possibly the most unfair solution to our problems: a 30% devaluation is an immediate seizure of all wealth held in the devalued currency. And it will fall hardest on the poorest sectors of society who are so much less likely to hold assets abroad in foreign currencies. And given the insider class within Ireland, you can be sure it would be the connected people who would best prepare for the devaluation by moving their assets abroad.

But the poorest in society who may not have much in the way of savings are more likely to benefit from jobs growth due to increased competitiveness. The biggest losers, imo, would be the insiders who get paid by the state in Euros. A senior civil servant, for example, would have their salary devalued with the currency. An indigenous exporting country, on the other hand, will receive a boost.

I dont think we will get a boost to exports either - 90% of Irelands exports originate from the MNC here, who import practically all their inputs. Whats gained on selling the exports, will be lost on buying the imports, assuming the MNCs even decide to do business in a currency as weak and untrusted as a Punt Nua. Id expect practically all MNC workers would prefer to be paid in Euros.

I think you are correct here with regard to MNC exports but exports by indigenous companies are the ones we really need to grow as profits made by them are much more likely to stay in the country and these indigenous companies are concerned with locally generated costs. And not just exports but import substitutions would also get a boost.

While workers in MNCs may initially want their pay in Euros, after a while they are going to resent having to pay foreign currency charges in order to shop locally, pay rent etc.

Also economic growth occurs best in conditions where investors can make reasonable assumptions about the risks they are facing. A stable euro is a benefit, a Punt Nua which would go up and down like a yo-yo any time there was a problem would be a liability.

The problem is that a stable Euro, like any attempt at fixing a price, creates instability elsewhere. The Argentineans thought they were creating stability by linking their currency to the dollar but all they did was create imbalances that led to their currency crisis.

Sand

But we've already seen massive capital flight and it is ongoing and not related to Ireland leaving the Euro but to fear that the Irish state will be unable to service its debts within the Euro.

We've seen some capital flight. Massive capital flight occurs when everything that isnt nailed down leaves the country to try retain value.

Our prospects of serving our debts outside the Euro arent going to improve. And we will not have the support of the ECB/Germany which has some interest in preventing contagion within the Euro.

But the poorest in society who may not have much in the way of savings are more likely to benefit from jobs growth due to increased competitiveness. The biggest losers, imo, would be the insiders who get paid by the state in Euros. A senior civil servant, for example, would have their salary devalued with the currency. An indigenous exporting country, on the other hand, will receive a boost.

We dont have much in the way of an indigenous exporting industry to hire these people. As I noted, 90% of "Irish" exports are from the MNC sector. The MNCs have an immense distorting effect on statistics relating to the wider Irish economy, despite doing very little bussiness within the Irish economy. So we can overestimate the benefit of a devaluation versus the associated costs.

I think you are correct here with regard to MNC exports but exports by indigenous companies are the ones we really need to grow as profits made by them are much more likely to stay in the country and these indigenous companies are concerned with locally generated costs. And not just exports but import substitutions would also get a boost.

I agree we need to encourage indigenous exporters, but a devaluation isnt required for that, in fact it could be harmful in that it would increase uncertainty over investment decsions and contracts.

While workers in MNCs may initially want their pay in Euros, after a while they are going to resent having to pay foreign currency charges in order to shop locally, pay rent etc.

I think most people would prefer to get paid in Euros. Theres not much that Irish companies make that I want (which is at the heart of the export weakness) so getting paid in Euros will save the hassle of foreign currency charges from Punt Nua to Euros.

People want to save and invest in a trustworthy currency. A punt nua, invented purely for the purpose of devaluation, at the mercy of incompetents in the DoF and the Central Bank, wont inspire trust.

Count Dooku

SkepticOne wrote: »

While workers in MNCs may initially want their pay in Euros, after a while they are going to resent having to pay foreign currency charges in order to shop locally, pay rent etc.

I think that MNC's will follow their standard practice link salary to hard currency, but pay in punts using exchange rate on pay day.
It will also allow MNC's attract best of best and increase their profits

Scofflaw

Count Dooku wrote: »

I think that MNC's will follow their standard practice link salary to hard currency, but pay in punts using exchange rate on pay day.
It will also allow MNC's attract best of best and increase their profits

It would, in short, complete the "race to the bottom" that many European commentators seem to believe we've been engaged in for the last several years.

Not only would we be a low tax haven, we'd also be payable in 'funny money' - we'd probably wind up with a requirement that tourists coming to the country convert so many euro a day (or whatever hard currency they had) to help us fund our still-euro-denominated foreign debt. Even if the state defaulted - and the state is probably the least likely to need or want to - the banks are still holding euro-denominated debt, and so are many of our companies and citizens.

I doubt that it would allow the MNCs to attract top foreign talent, because any talent with half a brain would insist on being paid in hard currency rather than our local bits of yo-yoing paper - after all, they'd hardly be looking to retire here.

cordially,
Scofflaw

P. Breathnach

Tora Bora wrote: »

The clever guys who have already converted their euros into some other currency, or gold, would become "punt nua millionaires" overnight:cool:

I'd sooner have €50 than be one of those punt nua millionaires.

Count Dooku

Sand wrote: »

And devaluation is possibly the most unfair solution to our problems: a 30% devaluation is an immediate seizure of all wealth held in the devalued currency. And it will fall hardest on the poorest sectors of society who are so much less likely to hold assets abroad in foreign currencies.

Another option is to reduce welfare PS payroll bill by 30-40% and abolish minimum wage.
In short term it will be political suicide for any party, but in long term it could save country from expelling from Euro and give some chances for recovery.
Poorest will pay in any scenario, questions are only when and how much?

SkepticOne

Scofflaw wrote: »

It would, in short, complete the "race to the bottom" that many European commentators seem to believe we've been engaged in for the last several years.

I know union officials in Ireland are fond of this phrase but I have not been aware of it being used by our European collegues. What do you mean by "race to the bottom" in this context and who are these European commentators?

Scofflaw

Something to bear in mind is that there is no mechanism whatsoever for any country to be expelled from the euro. Instead, the Treaties contain a commitment that all countries will join the euro - those countries that haven't joined technically have derogations, but a derogation must be sought, it cannot be imposed, and may not be allowed.

cordially,
Scofflaw

SkepticOne

Scofflaw wrote: »

Something to bear in mind is that there is no mechanism whatsoever for any country to be expelled from the euro. Instead, the Treaties contain a commitment that all countries will join the euro - those countries that haven't joined technically have derogations, but a derogation must be sought, it cannot be imposed, and may not be allowed.

None of that is set in stone. A lot is happening now that would have been forbidden a few years ago such as the bailout of Greece and the one that is believed to be under discussion at the moment with Ireland.

Scofflaw

SkepticOne wrote: »

I know union officials in Ireland are fond of this phrase but I have not been aware of it being used by our European collegues. What do you mean by "race to the bottom" in this context and who are these European commentators?

I was thinking of the comments written on foreign media websites - such as Le Monde - and the "race to the bottom" they're referring to is in the context of a social economy. The US would be seen by a lot of continental Europeans as being at the bottom, in the sense that they operate low tax and minimal government social support, as compared to, say the Scandinavian high-tax and high social support model. The view is that this makes individual workers more vulnerable to exploitation and shows a preference for the wishes of business over the needs of ordinary people.

Closer to Boston than Berlin, essentially - movement towards the US model is regarded as downwards from the point of view of many continental countries. It doesn't help that we spent the last decade flaunting our success as being a result of exactly those kind of policies.

cordially,
Scofflaw

Scofflaw

SkepticOne wrote: »

None of that is set in stone. A lot is happening now that would have been forbidden a few years ago such as the bailout of Greece and the one that is believed to be under discussion at the moment with Ireland.

The rules can be bent, but can't be broken without legal consequences - and even the bending has been the subject of legal challenge.

cordially,
Scofflaw

SkepticOne

Scofflaw wrote: »

The rules can be bent, but can't be broken without legal consequences - and even the bending has been the subject of legal challenge.

It would happen through a process of renegotiation like the changes we have seen so far which would have seemed unthinkable a few years ago. If the Euro doesn't suit Ireland, then it also doesn't suit other Eurozone countries to have Ireland in the Euro.

SkepticOne

Scofflaw wrote: »

I was thinking of the comments written on foreign media websites - such as Le Monde - and the "race to the bottom" they're referring to is in the context of a social economy. The US would be seen by a lot of continental Europeans as being at the bottom, in the sense that they operate low tax and minimal government social support, as compared to, say the Scandinavian high-tax and high social support model. The view is that this makes individual workers more vulnerable to exploitation and shows a preference for the wishes of business over the needs of ordinary people.

Closer to Boston than Berlin, essentially - movement towards the US model is regarded as downwards from the point of view of many continental countries. It doesn't help that we spent the last decade flaunting our success as being a result of exactly those kind of policies.

cordially,
Scofflaw

Can you link me to an article where that phrase (or the local equivalent) has been used? Doesn't have to be in English.

I don't think we're going to get out of this without seriously undercutting our competitors in other countries and thereby bringing money into Ireland. I can see why other European countries might not like things like our low corporation tax which they might regard as unfair but that does not mean we should go along with their desire that we remove it.

I think I can see where you are coming from in your opposition to leaving the Euro, but I think you're looking at this from the point of view of Germany and France, large core European economies. They don't want trading partners in the free trade area undercutting them.

Would this be a fair assessment of your position?

Scofflaw

SkepticOne wrote: »

Can you link me to an article where that phrase (or the local equivalent) has been used? Doesn't have to be in English.

I can't without a fair bit of searching around give you the exact phrase (aside from anything else, I read it in Google-provided translation). This Le Monde page of comments gives a reasonable flavour:

Ah, the rigor in times of crisis, the monetary orthodoxy, I was told that Ireland was a model, they have lowered their wages, pensions, state spending! And what happens? More deficit, more unemployment, and the loop is ready to begin. Read the article in the diplomatic world in October, it is very enlightening.In fact, this is not what kind of remedy that sets up the UK? Long live the Irish, the neoliberal model par excellence!

SkepticOne wrote: »

I don't think we're going to get out of this without seriously undercutting our competitors in other countries and thereby bringing money into Ireland. I can see why other European countries might not like things like our low corporation tax which they might regard as unfair but that does not mean we should go along with their desire that we remove it.

While some EU countries would like to see us raise our corporation tax rate, it's hard to see how they can require it - and even harder to see that they could require it and have the bailout work, in terms of Ireland's ability to repay, in terms of stabilising the euro, and in terms of having the European fund be preferred over the IMF.

SkepticOne wrote: »

I think I can see where you are coming from in your opposition to leaving the Euro, but I think you're looking at this from the point of view of Germany and France, large core European economies. They don't want trading partners in the free trade area undercutting them.

Would this be a fair assessment of your position?

Apologies - would what assessment? That Ireland shouldn't seek to undercut other EU states in competition for FDI? No, I have no grouse with that, apart from the fact that focusing too heavily on FDI multinationals has meant that the domestic business sector has become largely parasitic. We're not in a position to make do on our own markets, and to be prosperous, we're necessarily going to have to be an export hub of some kind, and that does mean being more attractive than other countries.

cordially,
Scofflaw