Will Ireland have to leave the Euro to save itself?

[kerrynorth]

The elephant in the room regarding Ireland's future prospects as an economy is our membership of the Euro. Our membership of the Euro was always a matter of politics rather than sound economics - no one really disputes this. Since our membership we have seen nothing other than a much more erratic boom and bust than at anytime in our economic history. This is principally because our prospects as a trading nation is still defined by our relationship with the US and UK rather than Continental Europe. We get our monetary policy from Frankfurt but our economic policy from London and Washington. What our membership of the Euro has shown is that we cannot cope with these conflicting forces.

Ireland has been consistently out of sink with the Euro economy. This is largely the fault of the Irish government rather than Frankfurt. If you have to live with an inappropriate monetary policy then the correct response of government is counter with fiscal policy. That means when interest rates are too low and the currency too weak that fiscal policy acts to dampen economic activity by not cutting taxes, giving out subsidies in the form of tax breaks, and by keeping public spending in check. Of course our FF/PD government did the exact opposite - Frankfurt cannot be blamed for this.

Now that the worm has turned the other way we do not have monetary policy to react and fiscal policy has been hopelessly compromised by the actions of government over the last decade. Previously we could have reacted to these circumstances through devaluation of the currency, thereby cutting the price of our exports but increasing the cost of imports. And devaluation has always worked for us in the past. Without monetary policy we will have to pay for our Euro membership through a severe drop in living standards - this is now unavoidable, anywhere between 10-20%. This will come in the form of real wage cuts and sharp increases in umemployment.

The currency situation now makes all previous predictions on the economy, including the ESRI, all redundant. I am now reckoning on GNP declining over 7% next year with unemployment hitting 15%, and 20% into 2010. I also reckon that the government will not be able to finance the deficit into 2010 - basically no one will lend to them. I have been accused of making outlandish forecasts in the past, however, not only have they come to pass, I have been proven to be somewhat conservative compared to the outturn.

Consequently, the only way I see Ireland avoiding economic armagedon over the next 2 years (barring a worldwide economic upturn that is just not a realistic prospect) is to ditch the Euro. Radical? Yes. Necessary? Absolutely in my view.

So I throw it open to the forum. Anyone with any better analysis or solutions?

[Bobert]

I don't think we should, though considering you're our very own Kerrynorthradamus I feel, neigh I fear, you're right.

[Ramon21]

Ireland leaving the euro would mean total collapse for ireland.
probably suffer for around 2 years before trying to get back into the euro-zone.
but will probably be to late to be allowed to get back in.
like it is with the uk, support is growing to join the euro.
but the question is will the uk be allowed to join?

[Seos]

Our membership of the Euro was always a matter of politics rather than sound economics - no one really disputes this.

I really dispute that!

[Dreaded_Estate]

I think your predictions on the likely unemployment and GNP decline and pretty much spot on KN.

But I'm not convinced that leaving the € would be the best solution to the problem.
If we delinked from the € and floated as an independent IR£v2 we would regain control of our monetary policy from Frankfurt but hand it straight over to the markets.

We simply do not have the financial clout or resources to control our interest rate or currency. The currency risk would be too great for most companies to bear. The vast majority of the multi-national companies here and here to sell their goods into Europe from a low tax base. Adding currency risk to a risk adverse business world would be too much.

I think it would be the final push to a large number of companies who are already considering the move to relocate elsewhere.


A few months ago I was able to see a way out of this mess for Ireland. I'm not sure I see it anymore. All the other possibilities are equally painful and just as unimaginable.
It is going to take us a decade to get out of this!

[stewiegriffin]

"Will Ireland have to leave the Euro to save itself?"
For a start . Then we could begin the extermination of the bourgeoisie and redistribution of wealth and bobs yer uncle , problem solved.

[H.R. Haldeman]

I think we've ballsed this up ourselves. Not one single measure to curb the credit binge/housing boom, and a whole bunch of measures to spend public money. Totally, totally arse-about-tit. We really shouldn't be in half the mess we are, but because of the negligence and venality of Bertie and Cowan, here we are.

I believe both of them to be in breach of laws about ethics in public office, specifically the gaining of advantage to themselves (namely, political power) to the detriment of the greater good (namely, the wise management of a credit boom) with full understanding of what they were doing/not doing. A crime in other words.

[kerrynorth]

A very relevant article in today's Times: Euro-zone club can offer comfort but at a price - The Irish Times - Fri, Dec 19, 2008

A case of great minds thinking at the same time - if not quite alike!

[Demotruk]

The experimentalist in me doesn't think we should drop the euro either way. It'd be very interesting to see how the euro holds up for us in these circumstances.

And the nationally interested side of me doesn't think we should give it up either. I think this whole currency fluctuation has alot more to do with problems in Britain and the US than in Ireland or Europe. Yes, we're going to be losing alot of pound and dollar income, we'll have to learn to export more broadly, but I'm getting the feeling that dollar and pounds are going to be worthless for some time anyway.

[ballot stuffer]

No no no no!

There would be an almost garunteed run on our new currency. Defending it would mean jacking interest rates to the sky. This would cause widespread defaults and possibly the collapse of our already fragile banking system.

Not defending it would mean rapid inflation.

There are simply no good ways for leaving the euro at this time to pan out.