Euro exit strategy

rounding tattenham Corner

Just wondering what peoples ideas about how a Euro exit strategy for Ireland or another euro country would work? we constantly here on the news about countries must leave the euro or will be forced out of the euro, but very light on how it would work.

The only way i could think Ireland could leave the euro and stop a flight of capital would be for the government with out notice closing the banks so probably Friday evening of bank holiday weekend and freeze all atms, then convert all deposits in to "Punts" and start the printing presses.

They would probably declare Marshall law since there would be mayhem on the streets and the army\police are not big enough to control everyone.
Of course the rich would have been forewarned and their money would have been transferred out in time.

Zubeneschamali

rounding tattenham Corner wrote: »

Just wondering what peoples ideas about how a Euro exit strategy for Ireland or another euro country would work?

It wouldn't work. Simples.

Godge

Zubeneschamali wrote: »

It wouldn't work. Simples.

+1

Trade would cease. Tourism would cease. Inflation would soar. Interest rates would go much higher than inflation. Shops would have little to sell.

fricatus

I've been thinking about this lately, because it's interesting, even as an intellectual exercise, to think how it would all work.

What I imagine is that at midnight (maybe on a Friday night) all Irish obligations (deposits, contracts, bonds, debts, mortgages) would be converted 1:1 into New Pounds/Punt Nua/IEN or whatever, but of course this currency would only be a virtual one while we started up the printing presses.

ATMs would still give out Euro notes and we'd still get our change in Euros. However, say the new currency floated 20% off the Euro in the first day, that would mean that if you took €100 out of your bank account, the bank would debit €100, but charge it as a foreign withdrawal (so, debiting your account by IEN 120 or thereabouts).

Prices would be set in the new currency, but say your Tesco bill came to IEN120, you could just put that on your debit/credit card as IEN 120, or else pay €100 odd in cash.

It would mean a lot of work for the banks to change their systems like that, and tons of mistakes would be made. Some payments could take weeks to get up and running again, but it would be doable I think.

Anyone know what happened when for example Ukraine, Latvia, etc. left the Soviet Ruble?

RichardAnd

fricatus wrote: »

It would mean a lot of work for the banks to change their systems like that, and tons of mistakes would be made. Some payments could take weeks to get up and running again, but it would be doable I think.

It might be possible to do it without too much trouble IN THEORY. But really, this is Ireland...

Nijmegen

It's quite technically doable, and is much as you describe it: The government locks your account, all those in the state including those denominated in foreign currencies, and switches them to Punts at a set rate.

It then keeps the banks locked until the Punt Nua begins trading, when it will drop 40-60% of its value.

Then the banks re-open.

It won't disrupt tourism etc, so long as we can give them Punts Nua when they arrive. Indeed, they may find themselves getting a great deal now that a pint of Guinness, produced in Ireland, will drop in price to €2.25 or their hotel stay in Bewleys - Irish wages etc - drops to €40 a night. Of course, for you and me it remains £4.50 and £80.

Where we're shagged is everything foreign. Your €399 laptop just became £599 and your salary is still €whatever.

Leaving the Euro, for our economy, would have a lot of advantages, if we're going to default anyway. Interest rates in the Euro will climb to 6% for example, which is not what you want when growing.

The downside is it will shag you and me as citizens.

n900guy

rounding tattenham Corner wrote: »

Just wondering what peoples ideas about how a Euro exit strategy for Ireland or another euro country would work? we constantly here on the anglosaxon-dominated english-only news from the city of London on the Guardian, Independent, Telegraph and other Pound/Dollar focussed news about countries must leave the euro or will be forced out of the euro, but very light on how it would work.

I've fixed your OP.

All of this talk is 99% in the english-speaking news. It would be a fantasic success for the City of London to break up the euro, or have some countries break off from it.

johnnyskeleton

Nijmegen wrote: »

It's quite technically doable, and is much as you describe it: The government locks your account, all those in the state including those denominated in foreign currencies, and switches them to Punts at a set rate.

It then keeps the banks locked until the Punt Nua begins trading, when it will drop 40-60% of its value.

Then the banks re-open.

What about property rights, or will all obligations i.e. debts be magically redenominated into the new currency? Because otherwise we will have a banking system that owes 400bn in Euro which it is trying to pay back with a worthless currency.

Nijmegen wrote: »

It won't disrupt tourism etc, so long as we can give them Punts Nua when they arrive. Indeed, they may find themselves getting a great deal now that a pint of Guinness, produced in Ireland, will drop in price to €2.25 or their hotel stay in Bewleys - Irish wages etc - drops to €40 a night. Of course, for you and me it remains £4.50 and £80.

Where we're shagged is everything foreign. Your €399 laptop just became £599 and your salary is still €whatever.

I don't think that is the case. As inflation eats away at worker's wages, they will insist on being paid more. You can't simply just assume that everything will magically cost less and therefore we will all be better off. Put another way, the only sensible way for things to cost less is for people to charge less for them. What is to say that if the new currency halves in value relative to the euro that we won't see a pint go from €5/£5 at changeover to €5/£10 when the currency devalues?

Nijmegen wrote: »

Leaving the Euro, for our economy, would have a lot of advantages, if we're going to default anyway. Interest rates in the Euro will climb to 6% for example, which is not what you want when growing.

The downside is it will shag you and me as citizens.

I'm sorry but the people who think leaving the euro is a panacea to the country's woes with only minor disruption to the life of ordinary citizens is not engaging with the full ramifications of what leaving the euro would mean.

Aside from potentially leaving the eurozone as well, such instability would drive investors away from the country, both domestic and international. There would be a flight to quality as people would desperately try to keep their euro. In fact, with a steeply devaluing currency people will lose confidence in it pretty quickly and will start using another de facto currency, most likely still the euro or perhaps dollars or sterling. This lack of confidence (which is virtually guaranteed if the purpose of the new currency is to devalue) will lead to even greater devaluation. We could in an extreme situation be left with no national currency and have to revert to the euro by default, after everyone is made a lot poorer.

You also have to remember something about contracts - they are binding. This means that if I agree to do something for €50, I can insist on it being paid in euro. Perhaps in the domestic economy the law could state that in satisfaction of a debt £1=€1 or that the new currency must be accepted to repay debts, but it is not so easy to enforce such terms on contracts that were created outside of Ireland.

Again, that is assuming that they are legally entitled to do so. Arguably, to redenominate one's savings is an interference with one's property rights.

Overall, such a move would lead to complete chaos. If anyone is to leave the Euro, it would have to be the stronger countries whose new currency would have a fighting chance of success.

fricatus

johnnyskeleton wrote: »

You also have to remember something about contracts - they are binding. This means that if I agree to do something for €50, I can insist on it being paid in euro.

Who says? Who's going to force me to pay in euro? You and whose army?

If Irish law says that contracts under Irish law are now redeemable in New Irish Pounds at a rate of 1:1 to the euro, then that's what it says! Unless you'r'e going to send in the Marines, that's the way it is, so tough!

That's basically what "default" entails, and yes, it would (as you rightly imply) be pursued in the courts, but like most investors and creditors, you'd probably be pragmatic and take your 30 or 40% "haircut" now, rather than go into some protracted court battle.

Nody

Beyond the fact a default would be far easier and cheaper to do also keep in mind that all the people involved who would find out it is even on the table (government, their clerks, secretaries, ministers, family members etc.) would force a capital run long before the government managed to implement it.

All this talk about doing it on a Friday etc. implies that no news got out and honestly there is no chance in hell of that; which means it will have to not only be a rush job but a rush job likely to end up in court as well!

douglashyde

For all the complexities associated with a "euro exit" caused from a default of our debt. A quick look to what happened in Argentina might give some idea of a worst case scenario: http://en.wikipedia.org/wiki/Argentine_economic_crisis_(1999–2002)

The fact of the matter is, a full default and a quick exit from the euro is an extremely unlikely case.

It is far more likely that "haircuts" will be enforced on bondholders along with further cuts and tax increases. And if this is the tradeoff to a euro exit for Ireland with all its attached implications, then I'd rather take the former.

astrofool

I think it would be a far cheaper hit to the economy to force an immediate balancing of the books, rather than euro exit.

Euro exit could effectively imply a 75%+ cut to the real wages/benefits in this country. Public sector wage, pensions, social welfare etc. could all be cut by ~30% to balance the books. There's probably another 3-4% in tax rises as well if they really want to push it, and some state assets for another couple of billion.

However, if we are to exit the euro, it's not going to at least be after the bailout has ended (why default, exit when you're being bankrolled anyway, esp. if you have no intention of paying it back).

Justin Collery

It is unlikely we will leave the €, but not unthinkable. Without central political authority, the solutions, thus far have been ham fisted at best. It is possible to see how if Europe cannot agree on some fiscal, and political integration, the whole thing could fall apart. From an Irish, or Greek point of view, looking at the € as a peg to the DM rather than a ccy union makes it easier to see the break.

The practical issues need to be addressed. One simple route would be to print a harp on all €'s in circulation in Ireland until the new currency is ready to circulate. No machines need changing that way.

JC

Tora Bora

Farmers in UK today, can choose to be paid the single farm payment from Europe, in either sterling or euro. They frequently change from one to the other depending on which is most beneficial based on prevailing exchange rates.

So Irish farmers would benefit.:cool:

n900guy

astrofool wrote: »

I think it would be a far cheaper hit to the economy to force an immediate balancing of the books, rather than euro exit.

With a euro exit, we could keep all the crappy underhanded politics and business under the carpet and have a devaluing currency without knowing any better. We can tighten our belts, devalue the currency and be blinded by ignorance of how our country is really run like in the Huaghey days.

Or, by staying in the euro, we have to cop on. I pick copping on. We are seeing the result of decades of how our political, business and banking leaders think.

Iceland wasn't in the euro, and had the same problems. The euro is not the problem, the lousy business sense and bad financial planning is.

HellFireClub

http://www.thejournal.ie/eu-leaders-developing-plan-b-in-case-of-greek-default-164219-Jun2011/

AS THE GREEK government faces a crucial vote this week on its controversial and highly unpopular €28bn austerity package, other European leaders are preparing back-up plans in case of a Greek debt default.
Athens must pass the package before accessing the next €12bn batch of its current bailout package – and before a second bailout can be finalised. Greece badly needs that €12bn to make its loan repayments next month.
The Financial Times Deutschland reports that Germany’s finance minister Wolfgang Schäuble said in an interview with a German newspaper that the EU is preparing for the worst, in case the Greek parliament rejects the austerity plan and ends up defaulting on its debt.
Schäuble said that the EU needs to ensure that “the infection risk for the financial system” resulting from a Greek default would be contained.
Greek Prime Minister Papandreou has already suggested that a second bailout, which EU leaders recently agreed is required, will reach in or around the amount of its current €110bn package.
Britain’s prime minister David Cameron has vowed to oppose any use of British taxpayer funds in another Greek bailout and has apparently secured the support of Germany’s Angela Merkel on the issue. Today, French President Nicolas Sarkozy said French banks are prepared to support Greece by allowing a significant debt rollover.
Sarkozy’s announcement could encourage other banks to pitch in and help avoid a Greek default.

ei.sdraob

fricatus wrote: »

Anyone know what happened when for example Ukraine, Latvia, etc. left the Soviet Ruble?

The us dollar became the currency of choice in early 90s for major purchases/sales such as homes cars etc

we could switch to punts but could be dual currency for long time, there are many countries where people are using the euro while not being an official member