David McWilliams: Ditch the Euro

[seabhcan]

Montenegro, the Vatican, Monaco and Kosovo have the euro as legal-tender without the single interest-rate (or a seat on the ECB I admit).

What is the Vatican's interest rate?

[atlantic]

They are trying to reinflate it again,but now people are in fear mode,job loses,save, fear of negative equity if they buy a house now as they think they will go lower.They could nearly hand the money free of interest ,the people don't want to borrow.

I see the ECB have dropped rates to 1%. I thought part of this whole euro argument - as put forward by the Telegraph and Irish economists channelling them - was that (a) low ECB interest rates forcibly produced a housing bubble without any Irish intervention, and that (b) we were now facing 'punitive' ECB interest rates that would slow our recovery.

Where's the housing bubble that the historically lowest ever ECB rates ought to be generating? And since when is 1% punitive?

[marmurr1916]

What is the Vatican's interest rate?

God only knows.

[ibis]

They are trying to reinflate it again,but now people are in fear mode,job loses,save, fear of negative equity if they buy a house now as they think they will go lower.They could nearly hand the money free of interest ,the people don't want to borrow.

So "wanting to borrow" and "expectation of positive equity" are also required to create a bubble - not merely low interest rates? I thought the argument was that we had no choice but to have a housing bubble, because of the low interest rates.

[atlantic]

The banks are worried weather the asset is going to go up in value,that what banks want ,need.They don't want to be left holding defaulted negative property.The banks are all ready in the sh1te going on the old thinking property only goes up not down and can never get overinflated ,well that thinking has gone out the window.The Low interest rates caused the Boom the rates moved higher because of EU fear of inflation and caused the bust.People now realise that interest rates do rise ,the more they rise the less mula you have to spend on other things,so better to wait for lower house prices,less to borrow less interest to pay ,they know the developers and banks are in sh1tstreet and prices are going lower.

So "wanting to borrow" and "expectation of positive equity" are also required to create a bubble - not merely low interest rates? I thought the argument was that we had no choice but to have a housing bubble, because of the low interest rates.

[ibis]

The banks are worried weather the asset is going to go up in value,that what banks want ,need.They don't want to be left holding defaulted negative property.The banks are all ready in the sh1te going on the old thinking property only goes up not down and can never get overinflated ,well that thinking has gone out the window.The Low interest rates caused the Boom the rates moved higher because of EU fear of inflation and caused the bust.People now realise that interest rates do rise ,the more they rise the less mula you have to spend on other things,so better to wait for lower house prices,less to borrow less interest to pay ,they know the developers and banks are in sh1tstreet and prices are going lower.

Sorry - you're actually saying that the ECB's low interest rates cause the boom, and the bust was caused by the ECB's increase in interest rates? Nothing to do with the US sub-prime crisis and the credit crunch? And how does "old thinking" that property would always go up come into the picture if the whole boom-bust simply followed ECB interest rates?



How does your model explain the way house prices in Ireland have been rising since about 1996?

[sauntersplash]

Even to an economic ignoramus such as myself this seems like a very far fetched proposal. Perhaps rejecting capitalism and reducing the nation to a series of anarcho-collectivist villages might be a valid cure for our economic ills too, but it's not exactly likely enough to happen for a serious economist to seriously discuss it.

[hiding behind a poster]

On the contrary, I support the euro as our legal-tender. It's the one-size-fits-all interest rate that's the problem. The ECB should also look at devaluing the euro to boost exports.

Once again FT, you cannot have a single currency with multiple interest rates. As has been explained to you many times, the second you have different interest rates, you have different currencies. If you have (and I really can't believe I've to explain this) a Dutch Euro with an interest rate of 2%, and a German Euro with an interest rate of 3%, then you IMMEDIATELY have different currencies - because by offering different returns, the two currencies are differentially attractive to investors. As a result, they are worth different amounts - because one is more attractive than the other. Dutch Euros would be traded against German Euros, with more than one Dutch Euro being required to buy one German Euro, due to the better return on a German Euro.

Now, PLEASE tell me you understand that that makes them different currencies.

[hiding behind a poster]

What is the Vatican's interest rate?

It doesn't matter. FutureTaoiseach was trying to equate accepting a currency as legal tender with his notion of there being different interest rates for the same currency. Needless to say, the analogy is useless - lots of businesses in Eastern European countries accepted the Euro as legal tender before they officially joined, but that doesn't change the fact that they were still monetary units of different value being traded there against each other. FACT is that you cannot have different interest rates on the same currency - by definition they become different currencies immediately.

[Geckko]

It doesn't matter. FutureTaoiseach was trying to equate accepting a currency as legal tender with his notion of there being different interest rates for the same currency. Needless to say, the analogy is useless - lots of businesses in Eastern European countries accepted the Euro as legal tender before they officially joined, but that doesn't change the fact that they were still monetary units of different value being traded there against each other. FACT is that you cannot have different interest rates on the same currency - by definition they become different currencies immediately.

Actually the other way around. The interest rates become the same immediately.

Also, a pedantic quibble. "accepting legal tender" is an oxymoron. Legal tender means "must be accepted in repayment for a debt". Note that there is no requirement that it must be accepted for payment of goods or services.