2 tier Euro

The Minstrel

Just wondering if anyone has come across any informed, credible comment with regard to the possibility of Ireland getting kicked out of the single currency, and the creation of some sort of 2 tier currency within the EU. Maybe someone can direct me to relevant sources...

later12

Ireland cannot be kicked out of the euro under the treaties. Admittedly, this is an absurd situation.

I think a two tier currency is not unlikely, there was a lot of talk about a PIGS dollar last October. I cannot think of any media references on this issue right now, although Quentin Peel in the FT ran some articles on it. In fairness, as things stand, it seems far less likely than the idea of a unified Eurozone governing system and an integrated fiscal union with a centralised fundraising capability. Nevertheless it cannot be ruled out altogether.

Has there been something about it in the media recently, or are you just curious?

raymann

later10 wrote: »

Ireland cannot be kicked out of the euro under the treaties.

I think a two tier currency is not unlikely, there was a lot of talk about a PIGS dollar last October. I cannot think of any media references on this issue right now, although Quentin Peel in the FT ran some articles on it. In fairness, as things stand, it seems far less likely than the idea of a unified Eurozone governing system and an integrated fiscal union with a centralised fundraising capability. Nevertheless it cannot be ruled out altogether.

Has there been something about it in the media recently, or are you just curious?

i had always assumed that when push comes to shove, under exceptional circumstances, they can do anything they please. i always thought this would have no real substance if the political will was there.

robd

It can't be directly kicked out, however the idea that any of the PIIGS countries may actually have to leave the currency is becoming more and more of a reality by the day.

The traditional way to fix an economy has been to devalue the currency and allow goods and services to inflate, thus reducing internal costs such as wages, public sector and welfare.

Within the EURO this can't be done so Ireland is left to try to increase taxes and cut costs. How far can it get with this, given the amount of EURO debt burden on most people due to the biggest property bubble in history? There's a breaking point there somewhere. Probably in 2 years time when the EU/IMF 85 billion runs out. Then what?

Portugal has no government due to austerity measures being unpalatable. Where are they going to get the funds to cover their deficit?

Greece hasn't been doing well at cutting costs at all and it's bailout will be used up at some stage soon.

And then the other dominoes? Spain ... Italy ....

The whole idea of single currency was that the risk was reduced due to 3% budget deficit and the strong countries (mainly Germnay/France) being their as backup to step in and cover. When the time has come, Germany and France (Merkel and Sarkozy) have told the PIIGS and in essence the EURO to f off.

So unless by some miracle, growth suddenly picks up over the next 12 months for all, the EURO is dead. For that to happen oil and commodities would need to drop to drop to about 25% of their current cost.

What I think is likely is that Germany and France will exit the EURO as they simply will refuse to contribute any more to it.

djpbarry

robd wrote: »

When the time has come, Germany and France (Merkel and Sarkozy) have told the PIIGS and in essence the EURO to f off.

That’s an interesting interpretation of events. Seems to me that Germany in particular are doing everything in their power to stabilise the Eurozone, which, in essence, involves telling the PIIGS to get their ****ing houses in order.

robd wrote: »

So unless by some miracle, growth suddenly picks up over the next 12 months for all, the EURO is dead. For that to happen oil and commodities would need to drop to drop to about 25% of their current cost.

All that needs to happen is a realisation among the general populace that government coffers are not bottomless pits of cash – you can only take out in welfare and public expenditure what you put in via taxation. It’s pretty damn simple. But then, given the appalling state of many people’s personal finances (in Ireland in particular), I guess this could be a difficult concept to grasp.

View

robd wrote: »

The traditional way to fix an economy has been to devalue the currency and allow goods and services to inflate, thus reducing internal costs such as wages, public sector and welfare.

Within the EURO this can't be done so Ireland is left to try to increase taxes and cut costs.

The net effect of devaluation and the associated inflation is essentially the same as taxing someone with cash and giving it to someone with debt (as the value of money is devalued in both cases). If that is what we want we can achieve the same thing by raising taxes on the people with cash and using it to create/increase a subsidy for people with debt (e.g. Mortgage Interest Relief).

The difference between the two methods is that in the second everyone will clearly see what is being done. In the first, people won't necessarily spot it and, the evidence is fairly clear, politicians having been let off the hook once will rush out and do it again and again since they can get away with it.

The Minstrel

On the 2-tier principle, I wasn't envisaging a second I or an S in the PIG acronym. As the third-largest economy in the eurozone, Italy are surely central to the project.

Hypothetically, if some sort of mechanism is put in place to allow a temporary (10 years?) 2nd-class devalued € for Ireland and co., how would the 1st class (German/French/Italian) Euro stand up to this. Is this notion even possible theoretically? Could the 2nd-class € follow the same roadmap as the autonomous national currencies did in the efforts to harmonise leading up to the launch of the Euro?

robd

View wrote: »

The net effect of devaluation and the associated inflation is essentially the same as taxing someone with cash and giving it to someone with debt (as the value of money is devalued in both cases). If that is what we want we can achieve the same thing by raising taxes on the people with cash and using it to create/increase a subsidy for people with debt (e.g. Mortgage Interest Relief).

The difference between the two methods is that in the second everyone will clearly see what is being done. In the first, people won't necessarily spot it and, the evidence is fairly clear, politicians having been let off the hook once will rush out and do it again and again since they can get away with it.

No it's not. We part of a globalized economy. Devaluing currency slashes wages and asset prices relative to other countries/currencies. This causes and increase in exports and a decrease on expensive imported items along with an increase in FDI. This is Economics 101.

The alternative is high unemployment which causes a cycle of jobs with newer jobs paying less. That's what you're seeing here with 14.5% unemployment. That ain't going to go away until our costs match other Eurozone countries.

robd

djpbarry wrote: »

That’s an interesting interpretation of events. Seems to me that Germany in particular are doing everything in their power to stabilise the Eurozone, which, in essence, involves telling the PIIGS to get their ****ing houses in order.

I guess you missed the part where the debts owed by Irish banks to German banks was paid by the Irish state, with injections which will top €100,000,000,000 when the dust settles, if indeed it settles. Bear in mind that the Financial Regulator which controls the banks is part of the Irish Central Bank which is itself a sub-bank of the ECB. This was and still is a mighty gap in regulartorly policy within the Eurozone.

The Eurozone as a system is much much bigger than just government spending.

P. Breathnach

robd wrote: »

I guess you missed the part where the debts owed by Irish banks to German banks was paid by the Irish state, with injections which will top €100,000,000,000 when the dust settles, if indeed it settles....

So how much did the Irish banks owe to German banks?

Prakari

djpbarry wrote: »

All that needs to happen is a realisation among the general populace that government coffers are not bottomless pits of cash – you can only take out in welfare and public expenditure what you put in via taxation. It’s pretty damn simple. But then, given the appalling state of many people’s personal finances (in Ireland in particular), I guess this could be a difficult concept to grasp.

The concept that’s most difficult to grasp is that if both governments and people started to reduce their debts, it would lead to a severe contraction in the money supply causing a major depression. Paying back loans reduces the money supply while taking out loans increases it. For instance, in the nineteenth century the U.S. government had the capacity to pay back its debts in full. However, they decided not to as this would have precipitated a recession. As long as we stay in a debt-based monetary system, debt is something that all of us will become increasingly familiar with as we depend on growing debt for economic growth. The system is ludicrous but the human race has got so accustomed to it that we never seem to challenge it anymore.

The Minstrel

Any thoughts on a € without Ireland? What are the implications of currency devaluation for PIG, is it a feasible alternative on the road to recovery? Would it help alleviate property debts? Would it serve to strengthen the value of the €? What are the chances of us getting forced out of the single currency, even on a temporary basis?

robd

Prakari wrote: »

As long as we stay in a debt-based monetary system, debt is something that all of us will become increasingly familiar with as we depend on growing debt for economic growth. The system is ludicrous but the human race has got so accustomed to it that we never seem to challenge it anymore.

I wouldn't say that. It's only been going in it's present form since 1971. I fully expect it to be replaced by something else within my lifetime. The debt based money system is as much a bubble as any other.

Here's a rather familiar looking bubble graph.


Debt based money only works if you can grow GDP at a high enough rate and keep inflation at a low enough rate. And they both rely on cheap energy, mainly to date cheap oil (like $30 a barrel cheap).

What the else is I don't know but it will change.

View

robd wrote: »

No it's not. We part of a globalized economy. Devaluing currency slashes wages and asset prices relative to other countries/currencies. This causes and increase in exports and a decrease on expensive imported items along with an increase in FDI. This is Economics 101.

The alternative is high unemployment which causes a cycle of jobs with newer jobs paying less. That's what you're seeing here with 14.5% unemployment. That ain't going to go away until our costs match other Eurozone countries.

Our exports aren't a problem - the statistics on them show they are one of the parts on the economy that are actually humming away at a reasonable rate. Naturally, they took a dip in 2008 - when the entire global economy tanked - but they are (more or less) back at "normal level" again as these are largely driven by demand in other markets.

Our domestic economy, which is where we see most of the unemployment, is largely related to the property bubble and associated crash. There are many serious structural problems in the domestic economy which have been largely ignored in the past.

Devaluing won't provide any short to medium term fix to these domestic issues since your local construction firm isn't going to start building new apartments when there is already an over-supply in the market. It will on the other hand cause our government debt levels to increase.

Nody

robd wrote: »

I guess you missed the part where the debts owed by Irish banks to German banks was paid by the Irish state, with injections which will top €100,000,000,000 when the dust settles, if indeed it settles. Bear in mind that the Financial Regulator which controls the banks is part of the Irish Central Bank which is itself a sub-bank of the ECB. This was and still is a mighty gap in regulartorly policy within the Eurozone.

The Eurozone as a system is much much bigger than just government spending.

This has already gone over in multiple threads; the countries (i.e. where the banks/funds lending money out from) to Ireland was not Germany, France etc. but UK and US. It is also to UK and US that the money to pay the bonds have been going and not to Germany, France and mainland Europe (who's share of loans have remained around the same amount through out the whole period).